SPY ETF Trade Setup
We are opening a December
expiration month SPY bear call spread
SPY closed at $124.99 on Wednesday (17 days to December 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 ABOVE 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) turned bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning up (See SPY chart)
30 day Historical Volatility is 29.98%, Implied Volatility is 27.27% - both numbers are near the middle level of their 52-week range which is considered neutral
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 :
$126.00 calculated based on previous intraday highs and technical resistance levels
$129.00 equals the upper price level of our 80% statistical probability range
$130.00 is the upper level of the Bollinger Band â€“ Upper solid purple line in the SPY chart below
We want the SPY call spread to generate a minimum .50 net credit AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the December expiration month option series SPY 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.
Premium Credit $.66
Total Option Premium Received $1,320 (Excludes commissions and fees)
Maximum Risk $7,200 (includes premium received for the SPY bull put spread)
Margin Requirement $10,000 (this is same margin used for the bull put spread)
20 contracts traded on each leg (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)
As with initiating the trade, the decision process for exiting our SPY bear call position will be simple:
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 the delta rises to .65 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 and remove the sense of urgency. 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.
If prices gap down tomorrow the call spread may not be available as published and we will hold off on the trade. Conversely if prices rise sharply then we will probably initiate the trade at higher strike prices with a similar risk profile as described above.
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.