How to Place the 5-Minute Friday Trade

Hi, everyone. Marc Lichtenfeld here, Chief Income Strategist for The Oxford Club. Welcome to How to Place the 5-Minute Friday Trade. Let me first say how excited I am that you’ve joined me here in Weekly Income Alert.

In this service, we’re going to be trading credit spreads, which are one of my favorite ways to generate consistent weekly income in any market. So I can’t wait for you to start trading them along with me every Friday.

Remember, in Weekly Income Alert, you’ll be able to watch me execute every single one of these trades in real time with my own money every Friday morning. But to make sure you’re as prepared as possible, I’m also filming this video demonstration that you can refer to whenever you like.

Now, before we get into the demonstration, here’s a quick example of a credit spread trade.

As a refresher, a credit spread is a strategy where you trade two options on the same ticker that are almost identical. The only difference between them is the strike price. With credit spreads, we’re always selling the more expensive option and buying the cheaper option.

So this results in a credit in our account, and if the trade goes according to plan − and according to our backtesting, it does about 86% of the time − we’ll get to keep that entire credit as weekly income.

Now that we’ve gone over the basics, let’s get into how to actually open a credit spread trade.

I’m going to be placing a trade through Charles Schwab. The details may be slightly different for your broker, but the general process should be very similar.

Okay, so we’re going to go to Schwab.com. Some people might prefer to use some of the trading platforms like Schwab’s Thinkorswim. All the brokers have different platforms, but to keep it simple, we’re going to do it on the website.

So on Schwab.com, you would click on “Trade” and then “Options.” And then you’re going to see a place to put in the symbol and the strategy. So we’re going to put in the ticker symbol for the Russell 2000, which on Schwab is $RUT. Each broker is going to have it a little bit differently. It might be .RUT or $RUT or just plain RUT.

Then we’re also going to put in the type of trade. You can see here on Schwab’s website that you’ve got two-leg spreads, three-leg spreads, combinations. We’re going to keep it really simple. We’re just going to do a two-leg spread, and we’re usually going to do a vertical put spread. There may be times where we do a vertical call, but it’s usually going to be a vertical put.

[Editor’s Note: Marc also occasionally recommends iron condors, which involve placing both a vertical put spread and a vertical call spread at the same time.]

And that’s because when it’s a vertical put, we are expecting the market not to go down very much.

So, you can see here that it automatically gives you a “sell to open” and a “buy to open” because, again, remember we’re selling one put and buying another. So you’ll choose the expiration date. We’re going to choose May 16 for this one. And then we’ll enter our strike prices. Now here the default has a debit, so they basically have the buy price − the option that you’re buying is more expensive. We don’t want that. We want a credit. So we’re going to change this, and we’re going to make the strike price 1,900 on the Russell. And we’re going to make the buy price 1,890, even lower.

And the reason we’re doing this is you can see here that as we’re recording this, the Russell’s trading at 1,965. So we want the strike prices to be pretty far below that so we have a lot of room for the Russell to move and for us to keep our credit that we are going to be selling this for. So if the Russell goes up, we keep the full credit. If the Russell goes down a little bit, we keep the credit. If the Russell goes all the way down to 1,900, we still keep the full credit. It’s only if it goes below 1,900 that things change.

So you’ll see the bid, the mid, and the ask. The mid is simply the midpoint of the bid and the ask. And you’ll see the same thing here. And you’ll see right here where it says CR $2.50, that’s a credit for $2.50. So that means if we traded this spread at the midpoint, we would get $2.50 per share, or $250, because options are traded in contracts that represent 100 shares.

Now, let’s say you don’t like that price. Let’s say you think you can get more than that. You can go over to the limit price here − you see the order type “net credit” and “limit price” − and you can increase it. Let’s say you think you can get $2.60, so you change that to $2.60. That means this trade will only be executed if you can get $2.60 for the spread.

It won’t execute just one leg of the spread. It won’t just sell the option or buy the option. It will only do it together if you can get that limit, your limit price. So that’s one of the really nice things.

Then you would hit “Review Order.” So it has the midpoint $2.50, but you put in a limit price of $2.60, so your estimated amount is $260. Here’s your commissions for Schwab, so your total amount would be $258.38 per contract. If you did two contracts, then you’re talking about $516 and so on and so on.

Now, one thing to keep in mind is how much is your maximum risk? There’s a real simple way of figuring that out.

We’re typically going to be trading spreads where the strike prices are 10 points apart. So all you have to do in that case is take $1,000 − because those 10 points in the spread represent $1,000 − subtract what you’re getting for the credit, which in this case would be $260, and your maximum loss would then be $740. So we’re risking $740 to make $260. So you’re getting probably about a 40% return on your investment in three weeks, assuming this works out. And again, it really should, because we are putting these options so far out of the money that the Russell really would need to drop pretty hard in order for this trade not to work out.

So once you’ve looked at this screen, if everything looks okay to you, you would click “Place Order,” and then you’re on your way.

And that’s really all there is to it. So all it takes is a few minutes to place a trade every Friday morning, and you have a great chance at some enormous gains.

I hope you found this tutorial helpful. If you have any questions, don’t hesitate to send us an email at mailbag@oxfordclub.com. My team and I will be sure to respond promptly.

Again, I’m so glad you’re here in Weekly Income Alert, and I look forward to hearing your success stories about using credit spreads to pocket consistent weekly income. I’ll talk to you soon.