Thursday, January 17, 2013

Short Call spread in SPY

This morning I put on a short 150/160 call spread on SPY. We are approaching the highs from September of 2012 and I am not so sure we will be able to breakout to new highs. One thing I would like to point out is the fact that I went all the way to December expiration for this trade. I collected $4.06 for the trade. There are two reasons I did this. These days balancing trading with all my other ventures I don't want to feel compelled to be glued to the trading screen. When I first started I felt like I had to watch every tick in the market. Now I have periods of super active trading, but for the most part I pick trades I really like and can set and forget.

And it doesn't matter whether I check daily, weekly, or every few weeks. Of course I can set alerts to let me know if I need to check in.

The second reason is I have a few long covered call positions that would benefit on the market going up. But I just want a little more downside protection in the event the market does indeed have a pull back from these highs.

I even acknowledge the fact that at some point this year the SPY could be testing 2008 highs near $157. But in reality I doubt we finish the years at the highs.

At the end of the day I like the risk/reward of this trade in respect to the other positions that I currently have on.

Time to set it and forget it!

Good Luck Trading!


  1. I did forget to mention that if we have a decent pull back of 5-10% that I would be willing to turn this trade into a iron condor by selling the put spread. But for now I will leave it as is and continue to evaluate the market.

  2. I should also mention a few other things about this trade:

    1) The return on risk is $4.06/($10-$4.06) = 68%

    2) The probability of success is 70% (look at top corner of screen shot)

    3) This has plenty of room to work as a return enhancement. Meaning the SPY can continue higher, and I can still take profits on the trade

    4) The breakeven is $154.06 (not taking into account commissions)

    5) Risk Adjusted return is (4.06 * 0.70) / ((10-4.06) * 0.30) =159% (note that when I am calculating the risk adjusted return, I am using simple math to get expected return and expected loss, based on probabilities)

    Given all of these additional thoughts, I think I will have to write a post on the vertical call spread.

  3. At some point between now and December expiration I think we will get a test of the gap put in right before the new year. Which this could give us a move to around $142 and maybe even as low as $140.

  4. The S&P 500 continues to defy gravity. But this small hedge is still $4 away from my break even point at $154 ish. At some point over the weekend I will likely put together a new post around my technical view on the S&P 500.

    But to point out the SPY has put in a new multi year high at $150.14 on 1/25/13. The all time high for the SPY is $157.52 put back in October of 2007.

    The question is will we get there before a pull back to digest the recent move?