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Deep-in-the-Money ETF Options Strategy

Check out this deep-in-the-money ETF options trading strategy.
Kirk Du Plessis
Apr 19, 2021

This inherent stability of ETFs provides an opportunity for options traders, especially for those who are not after the huge gains, but are happy to trade more frequently for smaller profits. Selling credit spreads is an excellent strategy for taking advantage of a trend, and making 5% per month on a portfolio.

Another excellent strategy is to use deep-in-the-money (DITM) options.

Benefits of Trading Deep ITM Options

DITM options have a relatively high Delta, which means that when the stock price moves by $1, the related option price moves by a similar amount. This means that the maximum amount of movement in a stock's price can be captured using the leverage of an option trade.

Options chart showing the moneyness of calls and puts

The basic strategy for trading an ETF (for example, QQQ) is similar to that of swing trading. You are aiming for small gains in short timeframes, and most trades will be completed within 1-2 days. The technical analysis requirements for a trade of this strategy are not onerous - in fact it is easy to over analyz, and end up not having the courage to make a trade.

In essence, you need to know how to identify a trend and be able to give a measure to the strength of the trend. You also need to be able to pick up the likelihood of an imminent trend reversal by identifying support and resistance lines. If the trend is up, you will buy DITM calls; if the trend is down, but DITM puts.

Focus On High Delta Options

The best option to pick is one that has a Delta between 70 and 90. This is so you are not buying the most expensive options, but you are still going to capture the movement of the stock as much as possible. You also need to pick an option that is about two months from expiry, so that time decay does not have too drastic an effect.

In any case, you will be in and out of the trade so quickly that time decay should not be significant. Set an entry for the trade somewhere near the lower end of the daily trading range, or wait for a one or two day pull back before entering.

Have Some Risk Management In Place

As soon as you have entered the trade, the first and most important step is to set up a stop loss. Only stupid and irresponsible traders work without stop losses, especially when dealing with options. The first rule of options trading is to minimize your losses! Having done that, set up an exit trade of about 12-15% profit. Quite often this will be filled within a day or two, which means that you get to do another trade.

Trading DITM options on ETFs such as the QQQ is an incredibly good and relatively easy strategy to generate regular profits. The time requirements are not too demanding, and the process can be somewhat automated.

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