SPY ETF Trade Setup
We are opening an August
expiration month SPY Bull Put spread
SPY closed at $107.07 on Wednesday (31 days to August expiration)
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is BELOW its 50-day simple moving average (see SPY chart)
SPY is trading 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 neutral (See SPY chart)
30 day Historical Volatility is 22.10%, Implied Volatility is 23.21%
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.
The Bull Put spread short strike price should be below defined support levels :
$101 calculated based on previous intraday lows and technical support levels
$102 equals the lower price level of our 80% statistical probability range
$102 is the lower Bollinger Band level â€“ Lower solid purple line in the SPY chart below
We want the SPY put 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 August expiration month Bull Put 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 $.65
Total Option Premium Received $1,300 (Excludes commissions and fees)
Maximum Risk $7,170
Margin Requirement $10,000
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)
As with initiating the trade, the decision process for exiting our SPY Bull Put spread 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 sold put) 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 to a lower price short strike. 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 the stock prices gap down at market open, we may hold off on the recommended trade until prices stabilize. When stocks firm up after a gap down, we will attempt to initiate the trade at the strike prices recommended above, or if we can get a similar risk/reward at lower strikes that is even a better deal!
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.