Reboot Trading With S&P 500 ‘Lotto’ Plays
In this article:
- ‘Cash close’ opens new doors in options
- Using butterfly ‘pins’ to grow accounts
- Is volatile stock market your cup of tea?
Why are so many traders focused on trading the S&P 500?
Market volatility continued today with surging job numbers, but the good news didn’t stop another down day across the stock market.
Simpler’s traders turn to the S&P 500 when the market gets topsy-turvy, and traders need a proven system to target gains in a high-risk environment.
Butterfly strategy trades in the S&P 500
This year has been a constant state of uncertainty in the stock market that has forced traders to make changes in trading strategies.
What changed in 2022 that, despite the volatility, traders could target strong gains with limited capital risk?
The S&P 500 (SPX) offers contracts on options with zero days until expiration. With heightened risk to options held for more than a day, there was an opportunity to adapt a proven trading setup focusing on big swings in price – up or down – without overnight exposure.
The classic butterfly found new wings in a volatile market.
Allison Ostrander, Director of Risk Tolerance at Simpler Trading, has used this adapted strategy to grow her account reliably even as the market twists and turns in the winds of uncertainty. She has labeled this adaptive strategy as the “SPX Lotto Pins” formula.
Now those 100-point swings in a day for the S&P 500 represent an opportunity for traders to work this butterfly strategy for gains.
‘Lotto’ trades have risk and potential
Limiting risk is a high priority for Allison with each trade she takes and in her overall trading plan.
Her “SPX Lotto Pins” trades are named according to the risk factor involved. Traders should always consider any trade a risk, and be willing to lose 100% of capital invested in the trade.
Allison’s lotto trades have a simple goal: risk a small amount of capital to potentially make substantial same-day gains. Allison has profited from violent market swings lower and higher.
Lotto trades have rapidly developed into her favorite short-term strategy. These trades are designed for same-day expiration butterflies taken in the last 20 to 40 minutes before the market closes.
Quick returns and steady income are a priority for Allison, as is limiting risk. She designed the SPX Lotto Pins formula as an option for both large or smaller accounts. The stock market has been challenging and, while this strategy has performed well, traders of all skill levels should take into account that these trades risk 100% of the capital investment.
Traders target SPX ‘cash close’ options contracts
Traders with large or smaller accounts tend to focus on a universal goal – grow the trading account.
The stock market this year has thrown all kinds of curveballs, twists and turns, along with shocking gaps down and rallies higher. Traders have sought a strategy to combat the uncertainty.
Enter the butterfly strategy working setups in the S&P 500 during the last minutes of the daily trading session.
Why the S&P 500 (Standard & Poor’s 500 Index), specifically the SPX?
The SPX is a target for options traders because the index “cash closes” at the end of the day – no share assignments and no overnight contracts. This limits capital risk to only the amount paid for the options contract.
The S&P 500 represents the 500 largest publicly-traded companies in the U.S. Which companies get listed is based on market capitalization (take the number of outstanding shares and multiply by the stock price). This includes companies in sectors such as technology, healthcare, energy, banking, and retail/wholesale, and specific companies such as Apple, UnitedHealth Group Incorporated, Chevron, JPMorgan Chase & Co., and Cosco.
In trading the SPX, options contracts are executed only on the expiration date and the underlying asset (stock) is not traded. These options do not pay dividends and are settled in cash at expiration. SPX options have various expiration dates that occur daily, monthly, and quarterly.
By comparison, S&P 500 (SPY) options contracts are based on an exchange traded fund, can pay dividends, the underlying asset can be traded, and SPY options can be executed from the time the options are purchased up to the expiration date.
The key change earlier this year in trading the SPX is when the S&P 500 began offering weekly SPX options with zero days until expiration. This presented another options contract that can be executed during the daily market session and cash settled at the end of day. This setup eliminates overnight exposure to capital and does not fall under the pattern day trader rule (PDT).
Because day trading is considered risky, there are strict rules surrounding it. For most traders to be able to take advantage of day trading, they are required to have at least $25,000 in their account – the PDT rule.
Traders with smaller trading accounts have limitations on how to day trade. The PDT rule limits traders with less than $25,000 to three day trades over a five-day rolling period. Traders who exceed these limits will have their accounts frozen for up to 90 days.
The SPX Lotto Pins formula is one method that makes it possible for traders with less than $25,000 to day trade. It is important to maintain a risk management plan and maintain discipline with this style of trading.
Allison has proven her style and strategy for lotto trades can be an effective setup for SPX trades in a volatile market.
Why the butterfly setup?
Traders often express how they can’t watch the market all the time and they are concerned about getting caught on the wrong side of an overnight move.
Simpler’s traders understand the concern and work to avoid this risk.
Allison uses the butterfly for lotto trades because it is a neutral, multi-leg setup that combines bullish and bearish debit or credit spreads. This strategy is used by Simpler’s traders in all markets.
Butterfly setups offer relatively lower capital outlay. The butterfly consists of buying one contract of the lower strike call, selling two contracts of the middle strike call, and buying one contract of the higher strike call. Essentially, a butterfly combines two vertical spreads.
Why risk money on lotto trades?
The goal of Allison’s new formula is to put together an options trade setup for “pinning plays” or “lotto” trades.
These setups are designed to target a specific strike price and automatically get out of the trade at the end of the day. No need to worry about the trade overnight.
As stated before, traders must be prepared to lose 100% of capital involved in the trade. A lotto trade is at the mercy of market action. Price action at the end of any session can fluctuate. An options contract can quickly lose or gain value very quickly as market conditions get wild.
Why does Allison use lotto trades?
The better question may be, “What trader wouldn’t want options trades that can manage risk with higher profit potential?”
Allison typically risks $150 (or less) with her SPX Lotto Pins formula. The goal is to target bold gains on big swings in both directions without any overnight exposure.
A case study example is her SPX lotto butterfly trade taken in the last hour of the trading day.
Allison got in for .40 and was looking for a 4000 pin on the SPX. The close was 3998.95 – just 1.05 off her pin strike. The reward was a profit of almost 3.55 (887% return on risk in under 30 minutes).
Trades like this, while they don’t happen every time, have made it possible for Allison to achieve her goal of weekly gains throughout the year, no matter how the market is moving. These risk vs. reward setups can add up even when other lotto trades don’t work and expire worthless.
The key for Allison is to follow strict rules established with the SPX Lotto Pins formula, and manage risk accordingly.
Are lotto trades your cup of tea?
This market has been tough for traders, particularly swing traders. There is an added level of risk in holding overnight positions when the market repeatedly has sharp swings higher and lower.
So how do you trade daily without breaking rules and while limiting risk?
Allison developed an answer earlier this year when she rebooted her approach to trading in an uncertain market. The S&P 500 presented an opening and she developed a plan to capitalize on the opportunity. Learn more from Allison in her Profit Recycling Mastery.