S&P500 ETF (SPY) trade

DOW Jones and S&P dropped two consecutive days post rate hike last Wednesday. I will monitor Monday's S&P 500 Index Futures (/ES) before market open to decide if I will proceed to initiate a Bull Put Credit Spread against S&P500 ETF (SPY). My view is that the SPY has a high probability of trading range-bound/consolidation between 195 to 215 in the next 1 or 2 months. Hence, I am keen to construct the following trade after the market open tomorrow:-

1. STO SPY 195 PUT strike, Jan Wk5 2016, 39 DTE 

2. BTO SPY 190 PUT strike, Jan Wk5 2016, 39 DTE

These 2 trades should be initiated concurrently and I am looking to collect premium of $1.20, which is $120 per lot options. In terms of risk, the max risk in this strategy should be $3.80, which is $380 per lot options if SPY drops to below 190 after 39 days. Do also note that the max risk should only happen if we do nothing against the trades after we initiate the trade. I will discuss trades repairs method in the next post. Basically, there are 7 adjustment/repair methods. 

In case you have forgotten the acronyms 

STO - Sell To Open

BTO - Buy To Open

Wk5 - Week 5 of the month 

DTE - Days to expiry

I will update tomorrow if I will execute this trade. Cheers!

Disclaimer: This is not a recommendation, it is just for educational purpose only.

Options Strategy - Bear Call Credit Spread

In the previous post, we discussed Bull Put Credit Spread.  In this post, let's decompose and explain Bear Call Credit Spread using Lifestyle Options Trader's method.

Bear Call Credit Spread (BCCS)
1. Bear -> Bearish Outlook
2. Call -> Call Options
3. Credit -> Receive premium
4. Spread -> Consist of 1 Long and 1 Short position

What does this mean if we were to deploy this strategy? It means we expect the stock price to go down or flat. We construct this strategy using two Call Options, one long (buy to open) position and one short (sell to open) position and we will receive premium.

Let's see the example below:-

This is Apple stock and it is trading at $110.49 (See 1). As we expect the stock price to go down or flat, we can construct BCCS using two Call Options. In this example, we select 115 strike and 120 strike (See 3).

1. We will buy to open 120 strike at $1.87 (mid of $1.85~$1.89) and;
2. We will sell to open 115 strike at $3.42 (mid of $3.40~$3.45) (See 2).
3. We need to open this two position together

We will receive a premium of $1.55 ($3.42 - $1.87) from this spread trade. The strike wide is $5 (120 strike - 115 strike).

With this strategy, as long as the Apple stock does not go above $115, we will take $1.55 as our profit ($155 profit for every options spread we create as 1 lot = 100units) upon options maturity. As the stock is currently traded at $110.49, there is $4.51 'buffer/cushion' before we take action to repair. If we do nothing and the stock price increase to $130, the maximum lose incurred would be $3.45 ($5 strike wide - $1.55 premium receive). The maximum lose would still be $3.45 ($345 loses for every options spread we create as 1 lot = 100units) even if the stock price shoots up to $200 or $300 upon options maturity.

When we construct Bear Call Credit Spread and Bull Put Credit Spread, we limit our losses (in this example $345 per options lot). If we choose not to take action against this defined risk trades, meaning, we create this options strategy trades, forget about it and only check again after the options matured, the maximum losses that we could incur will not exceed $345. This type of trades can bring peace of mind especially to those traders that do not/unable to monitor the market whole day.

Entering Options Strategy (Bull Put Credit Spread)

A lot of friends approached me and asked what is the best options strategy to deploy if he/she intend to start trading options with USD5k-10k capital? My answer is trading credit spread (bull spread or bear spread or combination of both). Trading credit spread is entirely different from few strategies that I shared in my earlier post. There is no concept of cost reduction and there is also no intention to buy the stock upon options maturity. Hence, I would categorize this strategy as a slightly aggressive strategy.

There are two types of credit spread, Bull Put Credit Spread and Bear Call Credit Spread.

Let's decompose and explain Bull Put credit spread using Lifestyle Options Trader's method.

Bull Put Credit Spread (BPCS)
1. Bull -> Bullish Outlook
2. Put -> Put Options
3. Credit -> Receive premium
4. Spread -> Consist of 1 Long and 1 Short position

What does this mean if we were to deploy this strategy? It means we expect the stock price to go up or flat. We construct this strategy using two Put Options, one long (buy to open) position and one short (sell to open) position and we will receive premium.

Let's see the example below:-

This is Apple stock and it is trading at $113.18 (See 1). As we expect the stock price to go up or flat, we can construct BPCS using two Put Options. In this example, we select 110 strike and 105 strike.

1. We will buy to open 105 strike at $3 (mid of $2.96~$3.05) and;
2. We will sell to open 110 strike at $4.65 (mid of $$4.60~$4.79) (See 2).
3. We need to open this two position together

We will receive a premium of $1.65 ($4.65 - $3) from this spread trade. The strike wide is $5 (110 strike - 105 strike).

With this strategy, as long as the Apple stock does not drop below $110, we will take $1.65 as our profit ($165 profit for every options spread we put up) upon options maturity. As the stock is currently traded at $113.18, there is $3.18 'buffer/cushion' before we take action to repair. If we do nothing and the stock price drops to $100, the maximum lose incurred would be $3.35 ($5 strike wide - $1.65 premium receive). The maximum lose would still be $3.35 if the stock price drops all the way to $0.

There are several repair strategies if the stock price goes against us. I will slowly reveal it in the future post. :)