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How I Trade SPX & SPY - My Key Strategies

Updated: Jun 7, 2022

The S&P 500 (more formally, the Standard and Poor's 500) is one of the most commonly followed indices available. It tracks the performance of 500 large-cap companies in the United States. It is considered the best benchmark for U.S. stock market performance because it represents the largest companies therein.

The SPY is an ETF which allows you to trade the S&P 500. You can trade stocks and stock options on the SPY. It also pays out dividends quarterly. The SPY will probably be better suited for smaller accounts compared to the SPX.

The SPX is an index for the S&P 500. It has about 10 times the value of the SPY. You cannot purchase shares and there are no dividends for the SPX. You can, however, trade options. In general, anything you can do with a stock option, you can do with the SPX.

In the charts below, SPY & SPX looks very similar, but notice the prices listed on the right. The current price listed for SPY is 409.62, while the current price for SPX is 4,102.20.

SPY: S&P 500 ETF Trust Fidelity Chart for Options Trading
SPY: S&P 500 ETF Trust

SPX: S&P 500 Index Fidelity Chart for Options Trading
SPX: S&P 500 Index

John, our Trade Small Trade Often Officer, trades the SPX daily. Let's take a look at two of his favorite strategies:

  1. Gap Fill

  2. 3 Month Highs/Lows

Gap Fill Strategy for SPX Options

The gap fill strategy centers around gaps up and down in price - you’re looking for the gap to be filled. If the market goes down it fills up, if the market gaps up it fills down. In the chart below we have circled two gaps in the SPX.

SPX Fidelity Chart for Technical Analysis: Examples of gap downs circled. Chart includes the 20 day, 50 day, and 200 day moving averages.
SPX Fidelity Chart: Examples of gap downs circled. Includes the 20, 50, and 200 day moving averages.

The first gap (circle on the right) is a gap down and we see the price come back up afterwards. The second gap is also a gap down, but the price has not filled up again yet.

We utilize this gap up fill down and gap down, fill up analysis along side other technical analysis tools such as Fibonacci retracement lines and volume profiles.

The chart we are using here also includes 3 moving averages lines: 20-day in red, 50-day in orange, and 200-day in purple.

Gap Fill SPX Example 1

Let's look at an example using the first gap down.

1. The gap down occurs

2. John enters in at bottom of the gap: 4,106

3. John exits his trade at 4,140. Rather than pushing to get 100% of the up, John mechanically exits.

"I try for about 50%, not 100% unless I'm really right on the trade and something has blown through. Generally 50-60% is what I'm looking for and I'm in and out within a few hours."

Gap Fill SPX Example 2

Let's look at this SPX chart and find a trade that would work for real time, if we were short for the day. The chart below gives our current state:

Generally, John will do a spread - selling and buying options of the same type, either calls or puts. Here we are selling a call option with a strike price of 4,150 and we are buying a call option with a strike price of 4,160.

The deltas here are 0.25 for the short call and 0.20 for the buy.

Max Profit: 220 Max Loss: 780 Probability of Profit (POP): 74% Buying power is 790.

Why trade a Bear Call Spread? Why not just sell one option and take more premium?

SPX Bull Call Spread Example: Buying Power 700
SPX Bull Call Spread Example: Buying Power 700

For example, below we are selling the one call option with the same strike price as above.

Max Profit: 900 Probability of Profit: 77% ...Max Loss: Buying Power: 77,722

Will we hit our max loss? The SPX will probably not go to zero, so most likely no. However, do you have 77k in your account you want to designate for this trade? Either that money isn't there or we don't want to hold it up for this one trade. Our bull call spread gives us insurance to minimize our risk while also decreasing buying power needed.

SPX Naked Option Position Example: Buying power $77,000
SPX Naked Option Position Example: Buying power $77,000

John notes in his video, "I don't like to trade index products without some kind of hedge. That hedge is buying the next out of the money strike."

You can move your buy to a strike price further out of the money to increase your max gain, though it will also increase your max loss and buying power.

3 Month Highs and Lows Strategy for SPX Options

This strategy take a high level look at the previous 3 months to determine potential price movements. We use the 3 month, 1 hour chart.

  1. Identify the highs: 4300

  2. Identify the lows: 3800

  3. Where are we now? Trending in between

So, we make a neutral play.

If we were close the highs, we might short it. It would be a longer term trade, 45 days to expiration or 30 days minimum. If we were close the highs, we would go long, also 30-45 DTE.

Keep in mind, we are still utilizing support and resistance lines and other technical analysis tools as indicators. The 3 month highs and lows is, however, good and helping us identify overall trends.

S&P 500 Futures Strategy for Options on /ESM2

/ESM2: E-Mini S&P 500 Futures (/ES), June 2022 (M2)

Find futures trading cheat sheets here.

This strategy works in a similar manner on the /ES, utilizing the 20-day, 50-day, and 200-day moving averages to identify price breakthroughs. We are looking at the daily chart with one minute candles.

The price breakthroughs we see:

  • breakthrough of the 200 (purple)

  • crossed the 20 (red) a few times, recently it crossed below

  • currently meeting the 50 (orange)

Let's look at a bull put spread example for June 1.

/ESM2: S&P 500 Futures Chart - Daily One Minute
/ESM2: S&P 500 Futures Chart - Daily One Minute

For our bull put spread, we want the market to go up. In the example below, we are placing our spread about 20 points away from the current price of 4,100, which isn't a ton of room.

Our max loss to gain ratio is good, at 1:4.

Max Gain: 48 Max Loss: 203 Probability of Profit: 76% Buying Power: 249

/ESM2 - E-mini S&P 500 Futures Bull Put Spread Options Trading Example
/ESM2 Bull Put Spread Example

Again, we look back at our chart and check for support and resistant points. There are two main volume peaks:

  • support at 4,085

  • resistance at 4,105

When making these trades, it's important to remember that the other players are professional traders. They will take your lunch money. And that is okay.

Just keep your trades small to manage risk and keep making trades. John notes in the video, "If I make this trade and go into this right now, it's going to be a $50 winner or a $200 loser for the day...and that's my prerogative."

We can play a naked put, but again our potential loss is much greater. "Now is /ES going to go to zero today? No. But what's the risk? What if it goes down 100 points? I'd be out a lot of money." We aren't interested in that sort of risk/reward ratio.

Play it simple, play it safe. Take the $50; make the $50.

Interested in a deeper breakdown? Schedule a one-on-one lesson with John or Guillermo

Checkout the full video below to follow along as John analyzes these trades. Find more SPX and /ES trade examples and returns below.

SPX & /ESM2 Trade Examples

John's SPX trade from the video with a 90% return!

Here are a few other trades and returns from the same week:

Want to see and follow more of our trade ideas and gain access to John and Guillermo for questions? Join our Daily Trade Ideas subscription and become a part of our trading community. Click the link below to learn more and join!

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