High Probability Options Strategy (Best Time To Execute)

ruticker 08.03.2025 21:05:02

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Okay, in this video, we'll share the details of a high-probability option strategy that will pay off huge if markets sell off but will not lose if the market rallies. That may sound impossible, but that's the potential power of options. So stick around to see how we do it. I'm **Mike Bella Fury**, and we're one of the top proprietary trading firms located in New York City since 2005 and now Miami as well. We are proud to have developed numerous great traders. Watch, take notes, and learn from the team at our prop firm so you can grow your trading account. Hi, I'm **Seth Freudberg**, and I'm the head trader of S&B Capital's options trading desk here in Manhattan. With all of the headwinds that the markets are facing, including the eruption of a full-scale trade war, geopolitical problems all over the place, and a potentially weakening economy coupled with stubborn inflation, it's no wonder that the market has taken a bearish turn recently. We're often asked by traders here on the desk to design hedges for longer-term market situations, like a sustained bearish period that can actually make large amounts of money if the market continues to sell off. That's what we're going to be covering in today's video. Now, before we get into how this option strategy works, if you're absolutely brand new to options trading and don't know much about how options work, we've put together a video for you to understand options basics. If you click the video appearing on your screen right now, it will lay the groundwork for you to understand the option strategy that we're going to be sharing with you in this video. Then, when you're finished, you can come back and watch the rest of this video to illustrate how the strategy works. Let's head back a few years ago to February of 2023. You'll notice at that time that the **Russell 2000 Index**, which is the index of small-cap U.S. stocks (it has the ticker symbol **RUT**), after sustaining a large selloff for most of 2022, began to bounce off of that **1650 level** in early October, around the same level it bounced back in June, as you can see. That bounce continued into the new year, closing at **1985.53** on February 3rd, 2023, close to where the index reversed, by the way, right around that crucial **2000 level** where it began to roll over in August of 2022 after having bounced over the summer, as you can see from the price chart. So let's suppose that on that day at the close, you pulled up an options chain that expired about three months later, the **April 28th options chain**, and you focused on the put side of the options chain. You headed down below RUT's trading price to the **1910 put strike price** and bought five of those. Then you sold five puts at **1900**, 10 points lower, then moved way down to the crucial **1650 level** where the market bounced twice in the previous year and sold five of those. Finally, for protection, should the index completely fall apart, you went ahead and bought five of the **1600 puts**. When you do that—buying a put below the market, selling two puts at two lower strike prices below the one you bought, and then buying one more put strike price at an even lower strike for protection—this entire formation is known to options traders as the **bear trap strategy**, which is a version of the **put condor strategy** that traders use when they're concerned about a bearish move but feel that it's likely that if the move were to take place, it would bounce where it had bounced in the past, which in this case is that **1650 level**. It's very important to understand how this works from a cash flow standpoint, which you're going to find very important as we keep moving through these examples. Starting with the puts that we sold, when we sold those **1900 puts**, we received a price of **4.355** for those. But remember, those pay off at a rate of **$100 per point** that the index closes below the put strike price. So you multiply that by **100**, and you sold five of them. The result of multiplying it all together is positive cash flow from selling those puts in the amount of **$2,775**. Using that same kind of calculation, we received **5,175** for the short puts we sold way down at **1650**. But remember, we bought the **1910s**, even higher than the **1900s** we sold, so those cost us a bunch. They cost us **$23,200** (they cost **3.875**). When you net it all down, there's actually a positive cash flow from this trade in this case in the amount of **$50**. This trade, which does best when there's a market pullback, unlike most hedges, actually pays you for getting into it—not a lot, but still, compared to most hedges, that's an interesting feature. Incidentally, your broker will require you to have at least **$19,950** in your account to enter this trade, which is also this trade's worst-case scenario. Okay, so now let's move to the day this trade expires, about three months later, on **April 28th, 2023**. As you can see, the index did in fact roll over at the same **2000 level** and then spent the rest of March and April channeling between **1700 and 1800**, closing at **1768.9** on the day that this trade expired. Now that the trade has expired, the options market can assign a final value to each option in the position. After taking into consideration that original **$50** that we received when we first entered the trade, focusing next on the highest options position—those five puts we bought at **1910**—well, those expired way above the index closing price. The way to calculate a put option's value is to subtract the index's final price from the strike price of the put itself, which, as you can see from the calculation, in this case generates a profit of **$70,000**. But don't get that excited because we're going to give most of that back because we sold those **5 1900 puts**, and we lost money on those because the index closed so far below its strike price. We end up, as you can see from the calculation, having to pay out **$65,500** (that’s **$100 per point** that the index closed below its strike price). Then, of course, the two options located below where the index closed—the **1650 short puts** and the **1600 long puts**—both of those closed with zero value because they don't pay off unless the index closes below their strike prices. So when you add it all together, you end up with a profit of **$5,050**, which is a **25% profit** in less than three months because you got the direction of the index correct. You're probably sitting there thinking, "Well, yeah, when you enter a trade where you make a profit if a bearish move happens and then you get that bearish move, then naturally you're going to end up with a profit." But what if we're wrong? What if the market doesn't move bearishly? What if we were completely wrong and it rallied? Isn't that the scenario where you'd lose on this trade? I mean, if you're wrong, you wouldn't expect to win the trade, would you? Well, let's take a look at that. Let's move to the end of that same year, to **December 13th, 2023**, where the RUT index had staged a significant rally, once again bouncing hard off of that same **1650 area** since late October, rallying this time to **1947.5** on Wednesday, December 13th, 2023, which was a Fed day, and the index was very happy about the Fed's announcement that day. So let's say that for whatever reason you felt that this bounce was overdone and that you were going to put on another bear trap trade. Had you pulled an options chain again expiring about three months later, on **March 15th, 2024**, and you went ahead and constructed another bear trap, figuring on a pullback. You bought this time five of the **181 puts**, selling five of the **1800s**, and as before, selling that **1650 put** and buying the **1600 puts**. If you again look at the pricing of all of these options and then examine the cash flow, you can see we again end up with a little bit of positive cash flow, which is intentional. But as we saw last time, the big money is made when the market pulls back. In this case, if we move forward to the day this trade expires on **March 15, 2024**, well, as you can see, we were dead wrong. Not only didn't the market sell off over the next three months, it in fact ultimately rallied, pushing up above **2000** to **2393.2** on the day this trade expired. So if we look at the settlement value of each of the options comprising this bear trap trade, that's going to be a pretty easy process because every single one of the options expired with no value. As you could see, even the highest put expired over **129 points** below where the index closed on the day these options expired. All puts expiring below the index price will go out worthless, meaning we get a kind of consolation prize of **$75** for being wrong because all four options expired worthless. The least we make is the original cash flow. In fact, at any price above the highest put, that **1810 put** in this case, we will win the trade. We will win that original cash flow as our profit. What I'd like you to take away from today's video is that option strategies are the only trading strategies that can provide a win even when you're flat-out wrong about the direction of an index or a stock. Of course, if you're right, you're going to make a lot more money by design; after all, it's a bearishly located trade. But if you happen to be wrong, there's no harm really. In fact, you make a small amount for your troubles. You, in essence, get paid for hedging your portfolio with the bear trap strategy. In most circumstances, professional options traders are well aware of the unique properties of options that allow these kinds of extremely flexible trades to be made, and hopefully, you're starting to get a feel for these yourself. Now, if you'd like to learn three more option strategies that our pro traders use, including the unique options trick that allows you to make money while you wait to buy stocks or ETFs at the price you want, and the options income strategy that allows you to make consistent money whether the market goes up, down, or sideways, and how to make money on a stock or index trade even if you're wrong on the direction, then click the link that's appearing right now at the top right-hand corner of your screen. That will open up the free workshop registration page in a new window, so don't worry, you won't lose this video, or you can register directly for free at **options.com**.

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