Cabot Options Institute Quant Trader – Alert (SPY)
SPDR S&P 500 ETF (SPY)
SPY has pushed into another short-term overbought state coupled with a gap higher today. As a result, we are going to once again add a bear call spread to the mix.
So, with SPY trading for 442.50, I want to place a short-term bear call spread going out 49 days and outside of the expected range to the upside, or 447. My intent is to take off the trade well before the August 18, 2023, expiration date. Additionally, due to lack of strikes, we are going with a 4-strike-wide spread for this trade.
IV Rank: 3.3
Expected Move (Range): The expected move (range) for the August 18, 2023, expiration cycle is from 428 to 457.
Sell to Open SPY August 18, 2023, 462 call strike
Buy to Open SPY August 18, 2023, 466 call strike for a total of $0.52 (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: -0.05
Probability of Profit: 85.20%
Probability of Touch: 28.10%
Total net credit: $0.52
Total risk per spread: $3.48
Max return: 14.9%
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 462/466 bear call for roughly $0.52, if my bear call reaches approximately $1.04 to $1.56, 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.