SPY ETF Trade Setup
We are opening an August
expiration SPY bear call spread
SPY closed at $109.65 on Wednesday (38 days to August option expiration)
SPY is priced ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart down below)
SPY is basically EVEN with its 50-day simple moving average (see SPY chart)
SPY is still BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is starting to turn up â€“ but is not yet bullish (See SPY chart)
30 day Historical Volatility is 24.17%, Implied Volatility is 22.91% - both numbers have retreated from recent highs
Upper range standard deviation is .84162, the lower range is -.84162
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.
We want the SPY Bear Call spread short strike to exceed defined resistance levels :
$113 calculated based on previous intraday highs and technical resistance levels
$115 equals the upper price level of our 80% statistical probability range
$114 is the upper level of the Bollinger Band â€“ Upper solid purple line in the SPY chart below
We want the call spread to generate a minimum .50 net credit AND we prefer that the short strike fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium).
PLEASE NOTE that we are initiating an August Bear Call Spread (based on Wednesday's closing prices). The recommendation is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.
20 contracts traded (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)
The rules for exiting the SPY bear call credit spread is:
Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If one of our short strikes is penetrated (closing price above our short call) AND after market close, if the delta associated with the short strike is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.
The July 10th Couch Potato Final Comment mentioned "...this past week stocks did a complete reversal which might suggest that prices found a bottom. Volatility is still relatively high and the recent gain is based on very low volume. We will continue to manage our risk and take advantage of what the market gives us by "legging" into call spreads when prices approach resistance â€“ or legging into put spreads near support. This strategy works well during high volatility; the key is to be patient and wait on the optimum trade setup..." The major stock indexes are at resistance levels, therefore we are following our trading plan by "legging" into a call spread.
Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.