Simplifying Zero DTE Options Trading with Alpha Crunching's Daily Forecast
In this article, we'll explore a real-life trade example that demonstrates how to simplify zero DTE options trading using Alpha Crunching's daily forecast. We'll break down the forecast overview, trade example, and key takeaways to provide a comprehensive understanding of this trading strategy.
Forecast Overview
The daily forecast for February 27th, 2023, was quite choppy, with a significant magnitude on the y-axis representing the average SPX points for a given period. The average move over the morning was approximately 18 points. It's essential to use these charts as a 4-day forecast and not as an exact predictor of market movements.
Trade Example: Monday Morning Surge
As the market opening approached, the author was looking for a morning surge followed by a leveling off. This forecast was used as a guide for potential trade opportunities.
Initial Thoughts
Before the market opened, the author analyzed the forecast and expected a morning surge, followed by a leveling off.
Trade Entry
The author entered a trade based on this forecast, using a combination of technical analysis and the daily forecast from Alpha Crunching.
Trade Exit
The author exits the trade, possibly done for the day, depending on how the rest of the market plays out.
Real-Life Trade Example
Market Analysis for the Day
The market momentum had slowed down significantly, making it difficult to trade. The analyst was expecting a morning surge followed by inconsistent trading in the afternoon. The chart showed a gap up from Friday's close at 39.70 to 40.02, a 30-point increase. The market surged until around 10:00 am, reaching a peak of 40.17, a 17-18 point increase from the open.
Key Chart Levels
- 4011: Gap fill level
- 4021: Previous resistance level
- 40.17: Short-term peak reached around 10:00 am
- 39.70: Friday's close
- 40.02: Gap up level from Friday's close
Trading Strategy and Analysis
The goal was to find a decent entry to sell premium and profit from a contraction, rather than trying to stay in a trade all day. A zero-DTE strategy was employed to sell a call option and buy a call option, resulting in a credit of $1.25. The rationale for this trade was to gain bearish exposure and profit from a potential peak in the resistance area at around $40.25.
Trade Execution
The trade was executed at around $40.12 (the Gap fill). The trader sold a 40.25 call and bought a 40.30 call, resulting in a credit of $1.25. The trade was entered with a small size to minimize risk.
Risk Management
The trader was looking to double down on the trade if it went through and the spread became worth an estimated $250, bringing the net credit to around $2.175. The goal was to take profits on the retracement and re-evaluate the trade.
Market Analysis and Trade Strategy
The market started to level off after entering the trade. The market never actually reached the target resistance area at around $40.25. The trade rolled over without reaching the desired outcome.
The analyst discussed a trade opportunity in the SPX market, where they initially shorted the spread at 40.25 and were able to buy it back for 75 cents when it rolled over. The analyst notes that it's early in the day and they didn't want to stay in the trade, as the market can be unpredictable and may experience a potential surge at 11 am.
Key Takeaways
- Use the daily forecast as a guide, rather than trying to pinpoint exact market movements.
- Combine the daily forecast with technical analysis to make more informed trading decisions.
- Manage expectations and don't try to predict market movements exactly, understanding that momentum and real-time events can impact the market.
- Focus on trading against key levels, such as quarter strikes on SPX.
- Look for a morning move up and short against key levels, taking profits when they come.
- Avoid trying to trade every tick of the forecast and instead focus on getting a good entry and managing risk.
- Be willing to adjust your strategy based on market conditions and potential surges or reversals.
- Focus on getting a good entry and not trying to stay in the market for as long as possible.
By following these key takeaways and incorporating Alpha Crunching's daily forecast into your trading strategy, you can simplify zero DTE options trading and make more informed trading decisions.