Cabot Options Institute Quant Trader – Alert (SPY)
Okay, we just sold a bear call in SPY for the January expiration cycle back on 12/1 and got out of the trade on 12/6 for approximately an 11% return. But, we still have 38 days left in the January 20, 2023, expiration cycle and the ability to sell some decent premium with the VIX hovering around 23.50.
Hopefully, I’m not pushing the envelope, but I’m going to try and add more premium to the mix by selling another bear call spread today. I’m going to take a very conservative stab since we’ve already locked in a decent amount of premium for January with our IWM iron condor looking to add even more. I can sell the January 20, 2023, 430/435 bear call spread in SPY for roughly $0.54. The trade has around an 88% probability of success.
SPDR S&P 500 (SPY)
With the SPY trading for 401.40, I want to place a short-term bear call spread going out 38 days and outside of the expected range to the upside, or 426. My intent is to take off the trade well before the January 20, 2023, expiration date.
IV: 23.40%
IV Rank: 17.8
Expected Move (Range): The expected move (range) for the January 20, 2023, expiration cycle is from 377 to 426.
The Trade
Simultaneously:
Sell to Open SPY January 20, 2023, 430 call strike
Buy to Open SPY January 20, 2023, 435 call strike for a total of $0.54 (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: 0.04
Probability of Profit: 87.90%
Probability of Touch: 24.09%
Total net credit: $0.54
Total risk per spread: $4.46
Max return: 12.1%
Risk Management
Since we know how much we stand to make and lose prior to order entry, we can precisely define our position size on every trade we place. Position size is the most important factor when managing risk, so keeping each trade at a reasonable level allows not only the Law of Large Numbers to work in your favor … it also allows you to sleep well at night.
I tend to set a stop-loss that sits 1 to 2 times my original credit. Since I’m selling the 430/435 bear call spread for roughly $0.54, if my bear call spread reaches $1.08 to $1.62 I will exit the trade. As always, I will keep you updated on the status of the position as it progresses and send any necessary updates as needed.