Elite Trader

I actually use the closing price of a SPY call and Put option which is approximately 2.00 to 2.50 (+ or - .50). It doesn't matter if those options are OTM, ATM, or ITM, "but" I do look for high volume (aprox. 10k or >) options. When there is less than 10 days left before expiration, I switch the options to 2nd month expiring third Friday of each month (no weeklies).

Thanks. 3 replies back because of 420 character limit.

It seems you are trading a mean-reversion strategy.If pullbacks in a defined trend or reversion of the bigger wave, how would you play this scenario:

SPY price is $250, buy on a decline with minimum target back to 1st buy entry of $240.

What sort of position sizing and risk control are you implementing and do you double position sizes on each level and/or hedge?

Do you buy the $240 OTM at each buy level below or buy ATM at each buy level?

1st buy entry is $240
2nd buy entry is $230
3rd buy entry is $220
4th buy entry is $210
5th buy entry is $200

I maintain a Risk to Reward of 1:1. So if an option closes at 2.50, my entry is Closing Price -25%( 2.50 -25%=1.90)
Buy Limit=1.90 / Sell Limit=2.40 / Stop=1.40
(+.50 Profit or -.50 Loss)

I do use a mean-reversion strategy within a defined trend. 2 trade elements are working for you.
Fill rates are not great (7 per month average), but this strategy creates a higher W/L ratio (70% or >). When 3 consecutive trade days do not fill, I add +.10 to the entry formula.

If a trend is predominantly strong and nothing is filling, I use options with a lower closing price (1.50 to 2.00), because the entry formula for cheaper priced options is as follows: Close > 2.05= -25% / Close > 1.70 to 2.05 = -20% / Close 1.70 and under = -17%.

Sell Limit Profit is dependent on Entry Price: Entry 1.60 and > = +.50 / Entry > 1.40 but < 1.60 = +.45 / Entry 1.40 and under +.40.

2nd buys do not occur often, only about 9% of the time. 2nd buys require that I watch the TWS all day looking for them; versus a single buy only requires setting up a semi automated Bracket Order and walking away. So entering 2nd buys are dependent upon, "do I have the time today to watch the TWS all day?"