Cabot Options Institute Quant Trader – Alert (DIA)
Dow Jones ETF (DIA)
I want to add some downside exposure so with DIA trading for 337.40, I want to place a short-term bear call spread going out 37 days and outside of the expected range to the upside, or 350. My intent is to take off the trade well before the May 19, 2023, expiration date.
IV: 16.83%
IV Rank: 12.2
Expected Move (Range): The expected move (range) for the May 19, 2023, expiration cycle is from 321 to 350.
Call Side:
The Trade
Simultaneously:
Sell to Open DIA May 19, 2023, 350 call strike
Buy to Open DIA May 19, 2023, 355 call strike for a total of $0.82 (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: -0.09
Probability of Profit: 81.68%
Probability of Touch: 36.16%
Total net credit: $0.82
Total risk per spread: $4.18
Max return: 19.6%
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 allows not only the Law of Large Numbers to work in your favor … it also allows you to sleep well at night.