The goal of this discussion on SPY Trading System is to show you winning methods you can use this year to successfully trade SPY.
The biggest Exchange Trading Fund in the US markets has enough volume and liquidity to make it an attractive vehicle for both bullish and bearish Day/Swing traders.
SPY TRADING SYSTEM: OVERVIEW
What is SPY ?
SPY is the Exchange Traded Fund (ETF) for the Standard and Poor 500 (S&P500).
This weighted index represents the biggest 500 companies in the US.
A bigger Weight is given to the companies with the biggest market capitalization.
That is how Apple and Microsoft ended up accounting for almost 10% of the growth in the S&P500; over the last decade.
Yeah we are in 2020 at the time of this writing 🙂
The huge popularity of SPY can be seen across different platforms.
SPY TRADING SYSTEM: SPY STOCKTWITS GROWING POPULARITY
According to Google’s trends, the worldwide web search interest of Spy Stocktwits has surpassed the household brand stock Apple (Ticker:AAPL).
This happened two years ago and it is not looking to reverse anytime soon.
Just to give you an idea, inside Stocktwits.com, there is a counter for each stock that represents the number of people watching it.
Here is the chart comparing SPY popularity to some heavy brand name stocks.SPY only trails very popular stocks of Stocktwits AMD, Netflix, Amazon and Apple.
AAPL Stocktwits popularity can be explained firstly by its worldwide brand name.
Over the years, the iconic company has gained followers through its products, services and innovations.
AAPL Stock Price growth is another reason for the huge success of the AAPL Stocktwits room.
It is filled with early investors who have developed an emotional attachment to the stock from their regular usage of Apple products.
Furthermore, Apple Stock is in the Top 3 holdings of the three US major ETFs SPY, QQQ and DIA as we showcased in this Post.
In trading terms, having a position on SPY means you are basically tracking Apple Stock for the most part except on rare instances.
SPY Stocktwits has three times more followers than Roku, a stock than gained over 360% in 2019 !
Yahoo Finance 2019 Stock of The Year number of watchers is more than 7 times lower compared to SPY Stocktwits watchers.
Markets Makers leveraged this rising popularity in 2019 and introduced additional expirations day for SPY options.
Unlike other ETFs (QQQ, IWM and DIA or XOP just to name a few), SPY is the only one with three weekly expirations.
SPY features Expiration Days on Mondays, Wednesdays and Fridays ( Just like all the the most Stocks).
What is this a Big Deal ?
It simply means that for that traders have more opportunities to take advantage of the movements (known as volatility) of this instrument.
The leverage comes from the fact that time is a major factor in options pricing.
Therefore, with closer expiration dates, options become cheaper and thus many traders can participate.
This in turn provides great liquidity for options traders.
One of the immediate consequences is that the Spread on SPY options are the lowest you will ever see.
The Bids and Asks for most Strike is 1 cent. Yes, it is that close most of the time.
SPY Trading System: Why Is SPY a Great Option Trading Instrument
Since this ETF by definition measures the health of the US economy through its biggest companies, its volatility reflects the general sentiment of the market.
We know how much sentiment can fluctuate on news of any sort.
As an Option trader, you will have many opportunities to benefit from this volatility without taking that much risk each time thanks to the many expirations as we explained earlier.
The weekly chart below from TradingView.com should help us understand the volatility of SPY since 2018.
The length of each candle is the distance between the Low and the high for than week.
Meaning that big candles represents a greater volatility.
In 2018, the average SPY weekly volatility was 3.1% versus 2.3% in 2019.
In Options trading, 2% over 5 days can translate into a substantial gains.
HOW CAN YOU BENEFIT FROM THIS KNOWLEDGE ?
I remember reading in “Pit Bull”, Lesson’s From Wall Street Champion Day Trader by Martin “Buzzy” Schwartz How he used to hammer SPY.
This is what he meant. When the market is volatile, the quickest way to accumulate gains is through SPY.
“Buzzy” was giving us accounts of his trading exploits in the late 70s and early 80s.
Four decades later, this remains true.
Below is a video example on How I leveraged this very SPY Trading System to generate 850% Profit !
2020 is an Election year. Which means that political rhetoric will be adding fuel to the headlines.
Consequently, volatility is bound to be even greater than the above number over the last two years.
Your SPY Trading System should start with what the big boys are doing as they throw large amount of money on SPY.
The data from FlowAlgo reveals how big institutions trade the Dark Pool with specific trade codes.
The series of codes 503, 504, 505 are what they used for trades that are routed across the Atlantic.
These are reported the next day typically. Where SPY is trading in regard to the Dark Pool levels gives a clear direction for your trades.
By my experience, The love to splash in the opposite direction just to throw other traders off but with patience, confirmation come and you are able to benefits from this knowledge.
SPY Day Trading Strategies
Day Trading is a good way to take advantage of the volatility.
In 2019, the common theme was “Buy the Dip”.
Whenever SPY would drop, sooner or later, computer will buy it up the majority of the time.
A recent article showed that the strategy to buy at close and sell at the open yielded over 25% in 2019.
I believe that it is absolutely true.
Numerous times, SPY and other indexes will gap up for no apparent reason other than the computers wanted it that way.
So in this scenario, bullish swing traders had the advantage.
SPY Trading Hours
There is little 15 minutes window after the rest of the market closes when SPY can be traded.
Very few traders may know about this.
So a good technique to add to your SPY TRADING SYSTEM is to wait for the last 30 minutes of the session and follow the trend with the assurance that you will close the position in that 15-minute window or hedge if you intend to carry it out for a swing trade.
There are tremendous option trade opportunities on SPY for those who pay attention to seasonality.
I have conducted several such studies and they tend to work about 66% of the time. No bad at all.
As new ones will be forming in 2020, I will be bringing them to you through our 2020 Option Trading Tips discussion.
We explained Why SPY is the perfect option trading security to generate a TRADING SYSTEM around in 2020.
Several successful option trading strategies were provided to take advantage of the Volatility in this Election year as the market is bound to react to the multiple headlines.
I hope you found this discussion valuable for your trading methodology.
If you would like to increase your knowledge and further your understanding of these concepts, may I suggest this similar article.
If you would like see how we put this information in application to make money trading Options, click here.
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