Cabot Options Institute Quant Trader – Alert (SPY)
SPDR S&P 500 ETF (SPY)
I want to add some additional downside exposure; so, with SPY trading for 411, I want to place a short-term bear call spread going out 42 days and outside of the expected range to the upside, or 429. My intent is to take off the trade well before the June 16, 2023, expiration date.
IV: 19.34%
IV Rank: 8.6
Expected Move (Range): The expected move (range) for the June 16, 2023, expiration cycle is from 393 to 429.
Call Side:
The Trade
Simultaneously:
Sell to Open SPY June 16, 2023, 430 call strike
Buy to Open SPY June 16, 2023, 435 call strike for a total of $0.72 (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: -0.09
Probability of Profit: 84.78%
Probability of Touch: 29.28%
Total net credit: $0.72
Total risk per spread: $4.28
Max return: 16.8%
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 430/435 bear call for roughly $0.72, if my bear call reaches approximately $1.44 to $2.16, 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.