Cabot Options Institute Quant Trader – Trade Alert (SPY)
S&P 500 ETF (SPY)
After SPY’s historic, 8.9% rally in November (which resulted in a few subsequent losses), I want to sell a bear call spread in SPY going out to the January 19, 2024, expiration cycle. We continue to stick with the probabilities knowing that losing trades will come from time to time. We don’t play on the fringes of the bell curve. Anomalies will occur, and when they do, oftentimes when selling premium using a high-probability approach, losses follow. That’s understood. And that’s why we diversify the strategies (a.k.a. poor man’s covered calls) we employ. But when considering November saw the second-best November since 1980, behind only the pandemic-driven rebound in 2020, remaining disciplined to invest within “the curve” by using a high-probability approach is key.
I continue to stick with our December 15, 2023, bear call spread, but plan to cut my losses soon if SPY continues to rally. We’ve allowed this trade to extend a little further due to the extreme overbought nature of the current market. But, we have to remain disciplined and minimize our losses at all times. Of course, position size is our first line of defense, cutting losses is a close second.
The current price of SPY is 458.50.
IV: 13.6%
IV Rank: 7
Expected Move (Range): The expected move (range) for the January 19, 2024, expiration cycle is from 442 to 472.
Call Side:
The Trade
Simultaneously:
Sell to Open SPY January 19, 2024, 475 call strike
Buy to Open SPY January 19, 2024, 480 call strike for a total of $0.75. (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: -0.07
Probability of Profit: 82.51%
Probability of Touch: 32.81%
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 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 475/480 bear call for roughly $0.75, if my bear call reaches approximately $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 always, if you have any questions, please feel free to email me at andy@cabotwealth.com.
