Traders ‘Pin’ Options Contracts For Gains

In this article:

• Producer Price Index (PPI) fuels inflation fire
• ‘Pin’ trades for higher risk-to-reward ratio
• Other traders miss these opportunities

The Producer Price Index (PPI) tossed fuel onto the inflation fire, one of the world’s largest banks revealed shaky earnings, and the Federal Reserve (Fed) exposed the possibility of unexpected higher interest rate hikes this month.

The PPI came in at 11.3% on Thursday, rising more than expected and a continuation of high PPI since March; JPMorgan Chase shares dropped more than 4% on news of bad bank loans and halting stock buybacks; and the Fed said it is open to hiking interest rates by 100 basis points – a full 1%.

As the economic turmoil unfolds and the market tries to price in the bad news, Simpler’s traders are “pinning” opportunities other traders may not be seeing.

Pinning plays target options profits

Simpler Trading has a team of traders who know how to adjust when the market creates a difficult trading environment.

Their trading plans include outside-the-box setups commonly called “pinning plays” or “lotto” trades.

Pinning plays are setups designed to target strikes and get out of a trade at the session close – these trades cash settle, meaning you don’t have to manually close the trade, it settles automatically at market close. This eliminates the risk of being assigned shares or holding contracts overnight.

These trades come with a warning label – traders must be willing to lose 100% of capital placed into the trade.

Just like buying a lotto ticket at the convenience store, once you pay for the ticket the only value it holds is the paper in your hand with printed numbers on it. A lotto trade is sensitive to market action into the end of the day, so it can lose or gain value very quickly, which is why you should be comfortable losing what you risk on the trade.

So why pursue a lotto trade?

These trades can be designed with a lower risk with higher reward opportunities. The low risk is all relevant to how much a trader wants to risk on the trade and, again, these trades cash settle.

Unique trading style ‘recycles’ profits

In this market, traders are often seeking more insight for maximizing the potential of trades.

“What type of trader will you be?” is a common question. Trading style is often determined by the time available to the trader and personality type or preference.

Maximizing profits along the trading path can come in the form of a mentor who knows how to “recycle” gains, even in volatility.

Learn more about this trading strategy, and gain access to live-trading sessions, real-time stock alerts, and how a professional taps into pinning plays.

Lotto trades not for faint of heart

Warning to traders with a faint heart – lotto trades are not typically used for daily trading strategies.

Traders attempting to pin the strike price on options at the end of the day are taking opportunistic or calculated risk.

Understanding lotto trades requires some insight into “pinning the strike price” in options trading.

The idea is to identify strong open interest on an options contract when the underlying security (stock or index) is holding close to the strike price on the day of expiration. Heavily traded options contracts tend to hold near the most expected strike price on the day of expiration.

Simpler traders watch for this pinning setup and look for strike prices to trade options later in the session on the day an options contract expires.

One of the favorite setups is on S&P 500 (SPX) options because the SPX “cash closes” at the end of the day – no share assignments and no overnight contracts. This limits capital risk to only the amount paid for the options contract.

For example, on Wednesday after the (CPI) report was released and the market was volatile, several of Simpler’s traders targeted lotto plays.

Allison Ostrander, Director of Risk Tolerance at Simpler Trading, designed a lotto setup on the SPX. The trade looked like this:

• Call broken wing butterfly – BOT +1 BUTTERFLY SPX 100 (Weeklys) 13 JUL 22 3810/3800/3790 PUT @1.30 [TO OPEN]

As the market continued to see-saw, Allison balanced the trade to counter any negative market movement by adding a call:

• Put broken wing butterfly – BOT +1 BUTTERFLY SPX 100 (Weeklys) 15 JUL 22 3880/3895/3905 CALL @1.30 LMT Net Debit [TO OPEN]

These trades filled and created a compound butterfly setup. 

This SPX lotto trade was a 10-point butterfly with a 3800 pin target. The SPX closed $1.75 off that pin at 3801.75. This means the trade cash settled for $8.25. When taking into consideration the cost basis of $1.30, this means the trade overall locked in a $6.95 profit, which is a 534% return on risk.

Bruce Marshall, Director of Options and Income Trading at Simpler Trading, also pinned a setup the same day.

Bruce looked to buy a broken wing fly using five contracts that required $2,500 in margin capital. His initial trade setup:

•  BUY +5 BUTTERFLY SPX 100 (Weeklys) 13 JUL 22 3845/3850/3860 CALL @-.15 LMT

As the day progressed, Bruce added on the lower end a 3800 regular butterfly at 10 points wide. The thought process was to get filled for $1 on one contract for $25 of risk, and on a pin the profit potential was roughly $1,000 at 3800.

• BUY +1 BUTTERFLY SPX 100 (Weeklys) 13 JUL 22 3810/3800/3790 PUT @1.00 LMT

Heading into the close, Bruce saw there was opportunity to take profits before the end of the day. Yet, he held the setups (knowing the risk if the market shifted against his position) and let the options cash close for a profit, ultimately totaling about $4,000.

Bruce also noted that these types of trades are designed to be scaled up or down based on the individual trader’s risk management plan. Traders with smaller accounts, or those who want to further limit risk, can scale down the risk vs. reward ratio.

As stated before, these are risky trades. While the design is to limit capital risk heading into the trade, any reward potential must be considered a “lotto” opportunity.

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Pinning plays for next-level trading

The current market environment has forced traders to consider stepping outside their established trading plan and pursuing different trading setups.

Not all setups, such as pinning plays, are a good fit for every trader. These lotto plays can be learned and traders must be willing to accept the risk.

Trading isn’t for everyone, but it can be an opportunity for those who want to take this learned skill to the next level.