SPY ETF Trade Setup
We are opening a June
expiration month SPY bull put spread
SPY closed at $133.34 on Tuesday (32 days to the June expiration)
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is priced BELOW its 50-day simple moving average (see SPY chart)
SPY is ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
30 day Historical Volatility is 12.20%, Implied Volatility is 18.19% - both numbers have risen as stock prices are dropping, but are still near the lower level of their 52-week range which is considered longer term bullish
Use the number of days to expiration, implied volatility number and 2 standard deviations to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.
The Bull Put spread short strike price should be below defined support levels :
$133.00 calculated based on previous intraday lows and technical support levels
$126.00 equals the lower price level of our 80% statistical probability range
$133.55 is the lower Bollinger Band level â€“ Lower solid purple line in the SPY chart above
We want the SPY Iron Condor to generate a minimum .50 net credit on each leg 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 June expiration month option series SPY bull put spread (based on Tuesday's closing prices). The suggestion is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.
Premium Credit $.6050
Total Option Premium Received $1,210 (Excludes commissions and fees)
Maximum Risk $8,790
Margin Requirement $10,000
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 put spread 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 below the short put) 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 up tomorrow the put spread may not be available as published and unless the gap is filled we will hold off on the trade. Conversely if prices drop sharply then we will probably initiate the put spread at lower strike prices with a similar risk profile as described above.
DIA Position Update ---------------------------------------------------------
DIA closed at $126.31 on Tuesday
DIA is priced at BELOW its current 14-day EMA (see DIA chart down below)
DIA is BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced BELOW its 50-day simple moving average (see DIA chart)
DIA is ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The April 25th Couch Potato published a May expiration DIA bull put spread
The put spread is approx. $1,700 in the red (see tables below)
$127 strike price short put delta is -.5877 (41% probability this position will be profitable)
We are rolling the $127 short put down to the $125 strike price
After the trade adjustment the total position should be approx. $500 in the black
May options expire on Friday and we are closing out the opening put spread to avoid a chance of assignment on the $127 short put. As mentioned above, we are planning a trade adjustment to minimize the loss. However if prices rise significantly then you can just close out the put spread (without the trade adjustment). Or if prices drop sharply we need to get out immediately (without the trade adjustment). Regardless of the price action, simply closing out the put spread is probably best if one is not comfortable adjusting a trade with only a few days left prior to expiration.
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.