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Weekly Options Trade Watch 7/1/2014 – Weekly Theta

Disclaimer:  This is not a recommendation to take a trade and is being provided for educational and informational purposes only.  See the full disclaimer.

Update 7/2/2014:

SPX took off on Tuesday morning and never looked back.  I did, however, sell the 1930/1920 Jul2 14 put spread for .45 early Wednesday morning.

Video:

This week is a short week for the markets and, as a result, I’m going to be looking for a trade in the weekly options a little earlier than usual.  I’d like to get filled on a weekly options trade either today or tomorrow morning.  The trade that I’m looking at doesn’t strictly meet the rules of the Weekly Theta system and that makes it a higher risk trade.  I will be managing risk in this position based on the open profit/loss rather than SPX price levels.

The video below gives a visual overview of the Weekly Theta trades I’m considering.  One thing I neglected to mention in the video is that there is a good amount of economic data coming out this week.  I don’t trade based on economic events, but it is good to be aware of when we might expect the market to move.

The Trade:

SPX closed around 1960 yesterday and is trading a few points higher as I write this a couple of hours before the market opens.  I’m looking at Jul2 14 put vertical spreads with a short strike around 1900-1910.  I don’t want to sell the 1900 or 1905 spread for less than a .45 credit and I don’t want to sell the 1910 for less than .50.

Daily Chart:

$SPX Weekly Options
65 minute chart of SPX with 5, 10, and 20 day simple moving averages. Important levels for the Weekly Theta trade are noted.

Risk and Targets:

At the time I place the trade, I will also put in a GTC order to buy back the vertical for 80% of the credit sold.  For example, if the vertical is sold for .45 I will be putting in an order to buy it back for a .10 debit.  Additionally, I’ll set an alert on the price of the vertical for 80% of the credit in heat (about $35 on a vertical that is sold for .45).  Note I put an alert on the heat below the level where I expect to get out so I have time to anticipate an exit before it becomes a necessity. If the trade taxes 110% of the credit in heat and/or price closes below the 1930 level, it should be closed.