Cabot Options Institute Quant Trader – Alert (SPY)
Today, given the extreme oversold readings we are coming off of from last week, I’m going to open a position in the S&P 500 ETF (SPY), more specifically a bull put spread. I’m giving myself over a 10% margin of error on the trade. I also intend on adding several more positions for the November expiration cycle over the coming days.
The IV rank in SPY is well above normal and I have no problem selling premium anytime we see an IV rank above 40. So, when the IV rank is sitting at 71.5, there is no doubt options premium is inflated and it’s a good time to sell a credit spread.
IV: 31.3%
IV Rank: 71.5Expected Move (Range): The expected move (range) for the SPY November 18, 2022, expiration cycle is from 337 to 392.
The Trade
With the SPY trading for 364 I want to place a short-term bull put spread going out 46 days. My intent is to take off the trade well before the November 18, 2022 expiration date.
Simultaneously:Sell to Open SPY November 18, 2022, 325 put strike
Buy to Open SPY November 18, 2022, 320 put strike for a total of $0.54 (As always, the price of spread will vary, so please adjust accordingly.)
Delta of spread: 2
Probability of Profit: 82.33%
Probability of Touch: 34.51%
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 by keeping each trade at a reasonable level it 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 325/320 bull put spread for roughly $0.54, if my bull put 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.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
