DIA ETF Trade Setup
We are opening a July
expiration month DIA Bull Put Spread
DIA closed at $120.70 on Tuesday (32 days to July expiration)
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is BELOW its 50-day SMA (see DIA chart)
DIA is still ABOVE its 200-day SMA (see DIA chart)
Relative Strength Indicator (RSI) is turning neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish with declining momentum (See DIA chart)
30 day Historical Volatility is 12.28%, Implied Volatility is 16.18% - both numbers are near the middle of their 52-week range
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 :
$119 calculated based on previous intraday lows and technical support levels
$117 equals the lower price level of our 80% statistical probability range
$119 is the lower Bollinger Band level â€“ Lower solid purple line in the DIA chart below
We want the DIA bull put spread 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 July expiration month option series DIA bull put spread (based on Tuesday'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 $.64
Total Option Premium Received $1,280 (Excludes commissions and fees)
Maximum Risk $8,720
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 the bull 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.
After stocks have been trading an hour or so tomorrow we plan on identifying an intraday support level to try to get a good price. If prices surge, the put spread might not be available â€“ in which case we will attempt to initiate this trade over the next few days until the price pulls back and we have a chance to get an acceptable credit amount for the risk.
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.