Cabot Options Institute Quant Trader – Alert (SPY)
With the market rallying this week and back into a short-term overbought state, I want to add a bear call spread to the mix. I’ll be adding an iron condor and potentially another bull put spread to the mix early next week.
SPDR S&P 500 (SPY)
With the SPY trading for 405.00 I want to place a short-term bear call spread going out 42 days. My intent is to take off the trade well before the October 21, 2022, expiration date.
IV: 23.3%
IV Rank: 26.0
Expected Move (Range): The expected move (range) for the October 21, 2022, expiration cycle is from 382 to 427.
The Trade
Simultaneously:
Sell to Open SPY October 21, 2022, 430 call strike
Buy to Open SPY October 21, 2022, 435 call strike for a total of $0.75 (As always, the price of spread will vary, so please adjust accordingly.)
Delta of spread: 0.04
Probability of Profit: 84.17%
Probability of Touch: 31.95%
Total net credit: $0.75
Total risk per spread: $4.25
Max return: 17.6%
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 (I use 1% to 5% per trade) 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 $0.75, if my bear call spread reaches $1.50 to $2.25 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.