So, this is what we have done. We have created a Bull Put Credit Spread and capture $1.20 ($120 per options contract) premium when SPY is trading at 200.
1. STO SPY 195 PUT strike, Jan wk5 2016, 39 DTE, premium $3.3
2. BTO SPY 190 PUT strike, Jan wk5 2016, 39 DTE, premium $2.1
If the market go against us after 5 days, says it drops to 196 and the technical chart shows that it is now consolidated in the range of 195 to 200. The 2nd method which I would suggest is to add a Bear Call Credit Spread (BCCS) to the position. Example of the BCCS that we can do is the following.
3. STO SPY 200 CALL strike, Jan wk5 2016, 34 DTE, estimated premium $2.8
4. BTO SPY 205 CALL strike, Jan wk5 2016, 34 DTE, estimated premium $1.8
We are capturing additional premium of $1.00 ($100 per options contract) and we have four open trades now.
1. STO SPY 195 PUT strike, Jan wk5 2016, 34 DTE
2. BTO SPY 190 PUT strike, Jan wk5 2016, 34 DTE
3. STO SPY 200 CALL strike, Jan wk5 2016, 34 DTE
4. BTO SPY 205 CALL strike, Jan wk5 2016, 34 DTE
Do note that for trade 1 & 2, the DTE is changed from 39 days to 34 days with the passage of time (after 5 days). With this additional 2 new trades (trade 3 and 4), we expect SPY to trade within the range of 195-200 in the remaining days to expiry.
In summary, we deploy this repair method #2 when we expect the stock/underlying to move slightly bearish.
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