Loading…

Weekly Options Trade Watch 7/16/2014 – 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.

Video:

We’ve been seeing a little bit of intraday volatility in the markets recently and my feeling is that there is some institutional selling taking place.  The Weekly Theta system still has a valid signal to sell a put spread so I will be taking a trade, but I’ll be using alerts to monitor the market closely.  Even with the intraday volatility, we haven’t seen a significant breakdown or violation of key levels and the market seems relatively neutral right now.  My fear with a put spread is always that the market will suddenly decide that it wants to flip from neutral to bearish.

Futures are trading lower ahead of the open this morning.  At the time I’m writing, they’re off around 11 points and that would put the SPX open somewhere in the neighborhood of 1970.

The all time high in the S&P 500 is up around 1985 and getting back to that level would make a put spread run smoothly.  Breaking back below 1960 or so would put our trade in danger.  That being said, if a move down happens in a somewhat controlled manner (hmm), we might be able to sneak a profit out of the trade.

The video below gives a visual overview of the Weekly Theta trades I’m considering.  Note that the vertical I sell will be influenced by where price opens this morning and whether we trade higher or lower in the first half hour to hour of the day.

The Trade:

SPX closed around 1981 yesterday and futures are trading about 11 points lower ahead of the open.  Based on closing prices, it looks like I should be able to sell a 10 point wide July4 14 put vertical with the short strike somewhere below 1920 for a .45 credit.

Chart:

SPX Weekly Options Trend Following
Intraday 65 minute chart of SPX with key levels and areas of potential support.

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 1949 level, it should be closed.

 

  • BigLaker

    This trade risks $10k to earn $45/ excluding commissions. How is this even profitable for you?

    • Hi Big Laker:

      The trade risks 955 to earn 45. That being said, the intended risk is 100% of the credit (~45-60). The reason the system can work is that the probability of winning is greater than the probability of losing, so:

      E(outcome) = P(winning)*avg win – P(losing)*avg loss

      Where the rough goal is (including commissions):

      E(O) = 75%(30) – 25%(50)
      E(O) = 22.5 – 12.5 = 10

      The numbers above are hypothetical, but that’s the idea behind the trades. Hope that helps and thanks for reading.