As indicated in the SPY ETF 30 min. chart below, the S&P 500 index has traded in a very tight range all week. Eventually, the price will break out of the range and the current trend signals an upside breakout. But there are technical indicators signaling the price is setup to pullback before moving much higher. January Options expire on Friday and from a risk management perspective we have to trade what we see.
Notice in the chart below that for each day this week, the SPY opened trading with a gap down. Also, you can see that each day prices recovered and filled the gaps. So far this evening, the S&P 500 index is down in after hours trading which points at another gap down in the morning. We plan on taking advantage tomorrow's opening gap to exit our SPY call spread and not risk the trade heading into expiration day on Friday.
As alluded to above, S&P 500 index might be stalling out at resistance and it may be a while before the price breaks much higher. This appears to be an opportune time to setup a February SPY call spread.
SPY Position Update ----------------------------------------------------------------
SPY closed at $147.07 on Wednesday
The January 2nd Couch Potato published a January expiration SPY call spread.
Unless the SPY ETF opens trading tomorrow with a hard gap down to around the $146.66 level, we plan on closing out this spread for an approx. $700 gain in the morning. If the SPY ETF gaps down and the price does NOT recover, we will hold off on the trade until expiration day.
BUT If the price DOES begin to recover after gapping down, we will immediately close the trade.
Just buy back the $148 short call contracts to close the position as the $153 long strike has no value and is not worth the commissions and fees. (see tables below)
SPY ETF Trade Setup --------------------------------------------------------------
We are opening a February expiration month SPY bear call spread
We want the SPY call spread to generate a minimum .50 net credit AND we prefer an 80% probability that the short call contracts will expire worthless and we get to keep most of the sold premium. The spread in the table below complies with our trading rules for initiating the February expiration month option series SPY bear call spread (based on Wednesday'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.
If prices gap down tomorrow the call spread may not be available as published and we will hold off on this trade. Conversely if prices rise sharply then we will probably initiate the call spread at a higher strike price with a similar risk profile.
Premium Credit $.61
Total Option Premium Received $1,220 (Excludes commissions and fees)
Maximum Risk $8,780
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)
SPY Risk Analysis
The risk is a sudden price surge threatening our SPY $148 strike price short call prior to Friday expiration day.
As discussed above, regular January options expire this Friday and we are looking to close out the SPY call spread 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.