Before I put this trade on I only have the 114/110 July '10 put spreads. So I feel like I am covered to the downside. I wanted to add a play that was neutral to slightly bullish, in case the market finally finds a bottom and catches a bid. But I wanted two conditions met. First is I wanted very little risk to the downside as this would eat into my profits from the put spreads that I own and second is that I wanted a wide range of profitability with some cushion beyond the current range of about 105-111 or about 60 handles on the /ES futures.
Lets break down the trade. I bought 5 110/111 call diagonals for a debit of $0.09. I sold the Jun2 '10 110 weekly options that expire this Friday and bought the front month 111 call options. This gives me a profitability zone of 104.64-112.28 by Friday expiration for the weekly short calls. My max profit is around 110 on the spy which would yield a profit of about $530 bucks. My maximum loss which would not occur until about 119 on the SPY would be about $545 on the upside. As I do not see this market taking off in a big way between now and Friday I am comfortable with this risk. In all reality I am looking at making about $200 on this trade.
The weekly options should decay quickly or quicker than the front month options that I bought. I would stop out of this position between 112.3-113 on the spy. I accept full risk to the downside of $45.
Today was yet another accomplishment. I finally was able to structure a trade in the time frame that seems to yield the best results for my trading style. More often then not I go out to far in the future when in reality I never really want to hold it that long.
ReplyDeleteWith as fast as things are moving I see no reason to do anything other than front month contracts.
ReplyDeleteI am really becoming fond of the SPY as a trading vehicle for several reasons:
ReplyDelete1) Very liquid
2) $1 strikes
3) .01 to .03 wide spreads more often then not.
I just got around to analyzing this trade, I have to say this is one of the best ideas I've seen in a while. I would probably even be willing to alter it a bit and do a ratio spread and make it $0 out of pocket or even a small credit. I just don't see the S&P going over 1120 by Friday. I haven't ever used or even looked at weekly options before. I remember reading about them a while back but that was it. This is basically a mini calendar spread, you speed up the expiration time using weekly options. I really like this.
ReplyDeleteWith the regular expiration schedule along with the weeklies and the quarterlies, you can literally trade an expiration week every week in the SPY.
ReplyDeleteWeeklies become even more attractive for short-term trading during times like these. I don't feel comfortable doing a typical one-month four week position. Days are like weeks right now as far as market sentiment and price action movements.
ReplyDeleteAnother trade that I looked at on Friday of last week was the selling the weekly strangle of 104/110. On Friday afternoon it was fetching about $1.90 and by today's close it was only fetching $0.69. This would had given you a profitability zone of 102.10 to 111.89.
ReplyDeleteOn Friday of last week I highly doubt I would have had the balls to sell a naked put on SPY. I maybe would have sold the put spread, and sold 2 calls for every one put spread, something like that. I have to say that last week felt great to watch it slide 3.5% in a day and I felt no panic. I like being in mostly cash and making short term structured risk/reward trades.
ReplyDeleteYeah I was in the same boat. But when I was looking at it I was looking to add a few 101 puts to protect the downside. All in all I liked the risk reward of the diagonal much more.
ReplyDelete