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How to Make Money Trading the S&P 500 Index

Not For Beginners

The method of trading described below is an advanced trading technique and is definitely not for beginners. Although the technique is relatively simple in design, if one is not knowledgeable in all of the different aspects of options trading and the repercussions that can occur, bad things will happen. That being said, let's move on.

Enlightenment

I had been trading Commodities for about 15 years when I accidentally stumbled upon this strategy being used in a large investment firm with dozens of professional investors using dozens of strategic maneuvers to lure investors into their firm. One of the trading techniques stood out like no other. Although I made a few modifications to his strategy, the principal is basically the same.

Fact

We all know how NASDAQ, the DOW and S&P work. Follow the charts and they go up and down on a regular basis. If you took an overlay of all 3 and laid them on top of one another you would see they all follow the same paths similarly. Economy goes up, the chart goes up. Economy goes down, chart goes down. The part of the fact I like is as the charts go up and down, it is almost steadily climbing upward. This gives the trader an opportunity to prosper.

The Idea

What we want to do is pick a low point in the S&P 500 where it hasn't been in quite some time. A point that has some higher volumes of trading going on in the options chains and has a low initial margin/maintenance requirement for selling PUT options. Currently the S&P is at 1334 and moving. We want to be WELL low of where it currently is.400 points out of the money is a good place to start your search. We also want to be about 60+ days into the future. There we start pricing PUT options that we are going to sell.

Research

Now we know what we are looking for. Let's look at a current chart and see what we can see. I am sure if you are an active trader you have resources of your own for checking charts, graphs and pricing options. If not, I like using this chart because it goes back to 1960.

http://stockcharts.com/freecharts/historical/spx1960.html

Now to find an put option that meets our criteria. If you don't have current resources, try this:

http://www.cmegroup.com/trading/equity-index/us-index/sandp-500_quotes_globex_options.html?exchange=XCME&foi=OPT&venue=G&productCd=SPU1&underlyingContract=SP&floorContractCd=SPU1&expMonth=201109

The 900 PUT option falls into the criteria we require for a successful trade. Again, your brokerage firm should have the calculations or calculator to find the initial margin/maintenance requirements.

The Trade

Entered Trade

Sell-1 (SPU1900P)
Price:------------------------------ 0.45
Cost:--------------------------($112.50)

Requirements

Total Cost--------------------($112.50)
Initial Requirement---------- $811.25
Maintenance Requirement $649.00

Total Requirements--------- $811.25
Estimated Commission------ $12.99

Breakdown

What did I just do?
Sell-1 (SPU1900P) = Sold one S&P 500, September 2011, 900 Put option.
Price-0.45 = The cost of the option = $250.00 X 0.45 = $112.50.
Please notice that the total cost is in parenthesis. This usually means a negative but since I sold it, It now becomes a double negative which makes it a positive.
Initial Requirement $811.25 = Money I needed to have in my account to place the trade.

Maintenance Requirement $649.00 = Money I need to maintain the trade. Cannot have less than that amount in my account.
Estimated Commission $12.99 = The cost to place the trade.
The final total of this trade is = I just made $99.51 on less than $1000.00.

Now What?

The option I just sold will expire on September 16th, 2011. If the S&P does not drop to 900 in the next 60+ days, the option expires worthless and I do it again. If the market moves up, the cost of that option moves down, along with that is the time value. It gets worth less every day as it gets closer to expiration. Most of the time even if the market moves down towards the option, the margin remains the same due to the devaluation of time. You can also buy the option back at any time if you wish to close the trade. Say the "Doomsday" report just came out. Of course, we're ALL in trouble then.

Summary

Well that's it. Actually pretty simple, pretty basic. If you have access to all the tools required, paper trading is always the best way to start. The way I do it now is to wait another 30 days and put another trade into place. It is better to wait until the market is on a down swing when doing this for you may pick up a few more dollars or you can move down farther in the option chain and make the same amounts. Either way, it works.