New Trade Entry : SPX Weekly Credit Spread for May 2 cycle Below is the credit spread position entered a short while ago:
SPX Credit Spread Position Entered Friday, May 2, 7 days prior to expiration. The Option Code for this cycle is SPXW140509, expiring May 9.
The 20 day Moving Average was at 1868.78 at the time of entry, with SPX at 1881.34. Because the price of SPX was above the Moving Average, a Put Credit Spread was entered.
SPX May 2 Credit Spread shortly after entry
Time of entry: 1:30 pm Eastern. SPX price: 1,881.34 at entry; VIX at 13.27
SOLD May 2 1840 Put. Delta -.12 at time of entry
BOUGHT May 2 1830 Put
Credit received: $.80
Maximum margin/risk is $920. Maximum risk is the width of the spread ($1,000 less credit received $80).
Target Gain: $60 (75% of credit received). This gain represents a 6.5% gain on actual margin.
Maximum Loss: $80
Below is the 6 month SPX chart showing the strikes entered:
SPX 6 month Chart:
Please note that the delta of the short 1840 put strike that I sold was only -.12. More aggressive traders may choose the next higher strike, which is still within the guidelines. This would be the 1845 short put strike, with a current delta of -.14. I personally felt more comfortable being a little further away from the underlying.
I recommend that a "good to cancel" order be entered to close the position for either target gain or max loss. This can be done using an OCO (one-cancels-other) order on most broker's platforms. Each broker is a bit different; I suggest that you contact your broker for the proper setup of the OCO. Having this in place removes the emotions that can sometimes cloud a trader's judgement, and reduces the amount of time needed to be at your computer monitoring the position. Please keep in mind, however, that in the event of a very fast moving market, there is always a chance that an automated OCO may not fill. If I see the market moving very quickly against my position, sometimes I will take off the OCO and manage manually.
Having said that, it is a traderâ€™s individual decision whether to wait for target gain, or max loss, on any position. Trading is a blend of oneâ€™s individual style, risk tolerance, and intuition. This combination can help reach your annual trade plan results. I recommend following your own trade style; there is nothing wrong with exiting a position early. Remember with weekly trades, there are up to 52 opportunities in a year to trade so it is important to be comfortable with your trade size and position. Remember, trading is an art, not a science.
For those unfamiliar with this trade, the guidelines were published on May 12, 2013. The article can be found here: Link to Articles
The original guidelines call for a Tuesday entry, however, but I have found that sufficient credit is often available for an entry as late as Friday, depending on volatility levels.
Trade updates will be posted as appropriate.
As always, stay keen on your risk management and trade carefully.