Cabot Options Institute Quant Trader – Alert (SPY)
Okay, it’s time to ramp things back up again. I want to sell premium for the December expiration cycle and I’m going to start with a bear call spread and hopefully, over the next few trading days, add an iron condor and bull put spread in a few other of the major index ETFs.
SPDR S&P 500 (SPY)
With the SPY trading for 334.10 I want to place a short-term bear call spread going out 36 days. My intent is to take off the trade well before the December 16, 2022, expiration date.
IV Rank: 39.3Expected Move (Range): The expected move (range) for the December 16, 2022, expiration cycle is from 367 to 414.
Simultaneously:Sell to Open SPY December 16 2022, 420 call strike
Buy to Open SPY December 16, 2022, 425 call strike for a total of $0.65 (As always, the price of the spread will vary, so please adjust accordingly.)
Delta of spread: 0.04
Probability of Profit: 86.45%
Probability of Touch: 27.12%
Total net credit: $0.65
Total risk per spread: $4.35
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 420/425 bear call spread for roughly $0.65, if my bear call spread reaches $1.30 to $1.95 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.