Options Trading Newsletter - KNOWLEDGE - Issue #155 - [Options Today - BEAR CALL SPREAD ON SPY]
Knowledge...
KNOWLEDGE…
You would gave heard the saying, "Knowledge is KING…" Yet, it's essential to recognize that knowledge, when left unapplied, loses its power. Consider the many books and materials we consumed during our university days; personally, I've found that less than 20% of that information was directly applicable in my subsequent career. This realization is not uncommon, leading many to halt their pursuit of new knowledge once they exit the academic world. Their learning becomes narrowly focused on what's required to secure their monthly paycheck, sidelining growth in areas not directly tied to their job responsibilities.
This approach, however, constrains one's potential. Advancing in your career or navigating the path of entrepreneurship demands an expansion and application of knowledge beyond the confines of daily tasks. The cessation of learning marks the end of personal and professional growth. Hence, it's imperative to continually seek out new knowledge, ensuring it doesn't gather dust on the shelves of your mind but is actively employed in your quest for success.
Don’t ever stop accumulating knowledge because the day you stop is the day you cease to grow.
SPX (5137)
Strong rally last week, SPX added around 1% again for the week. Last week’s release of PCE index was as expected 0.4% while GDP monthly came at 0% versus 0.2%. Unemployment claims ticked slightly higher 219k versus 215k. So far any data released has been overcame by the bullish momentum buying frenzy especially on the technology side, where many continue to hit new 52 highs.
It’s pretty much green in all sectors except, healthcare. The semiconductor AI play is still hot with NVDA up 4% for the week.
Trading range for the week is 5100 to 5200.
NDX (18302)
NDX is up above 18000 level once again and closed at 18302 last week, up another 1.44%. It’s up 8.8% in 2024 which is a great start of the year but most people question how far can the rally continue and so fat it just continues up without any doubt. Staying out and waiting for a retracement is just too painful place to be at as all retracements has been short lived. But going in now is neither going be a great one if it doesn’t go your way and you will end up buying the top.
So if you are in, continue to enjoy the ride with stops close by and if you are not, then just trade it short term with stops at support levels or use defined risk options structures.
Trading range for the week is between 18000 to 18600.
HANG SENG INDEX (16589)
HSI fell below 16400 last week only briefly. If you had an opportunity to buyin, the trade would be positive as it is now hovering around 16500 level. We are looking for good entry levels anytime it dips but closely monitoring the upper trendline as we want it to become a support level.
OPTIONS TODAY - BEAR CALL SPREAD ON SPY
Today we start to see some resistance in SPY as prices keeps rejecting at $512.6 level during start of the trading session. So we decided its time to play a little short on SPY by using a defined risk strategy - Bear Call Spread.
Considering CPI release is coming in less than 2 weeks, the market should cool off until then to decide if the party continues. Expect some small retracement till then.
Trade Entry (April 19 DTE)
Expected move is +/- $16.62. SPY is trading at $512.60. So on the upper side, the expected move is to $529.22.
So we sell a call at the expected move ie. $530 strike and Buy a call at $535. Premium is $0.95. Max Loss is $405.
Trade Variation
We made some variation to the trade by selling 2 Bear Call Spread and selling a Bull Put Spread at the same time. The Bull Put Spread is by selling a short put at $495 and buying a put at $490 for a premium of $0.65.
The total credit for 2 Bear Call Spread and 1 Bull Put Spread is $2.60. Max Loss if price goes above the Call strikes is $745.
If price goes down below the put strikes, the max loss is $245.
If price stays between the range $490 and $535, the trade will be in profit.
The reason we added the Bear Call Spread is just in case, the market continues to rally, we could set-off some small losses in the Bear Call Spread until the time we see a market correction. Downside is we have put a cap price that SPY could drop because anything lower than the strike prices of the Bull Put Spread, the trade will go into losses.
Trade Management
Exit when trade profit is 25-50% ie. $65 ~ $130. We exit earlier because of the possible sudden strong one directional move either side and increase volatility.
Exit any legs if the extrinsic value left is less than $0.05.
OPTIONS TODAY - WINNER HPQ BUTTERFLY EARNINGS TRADE
HPQ earnings did not fate well as it went down post earnings release before market open on Thursday. However, there was a consolation last Friday after Dell’s good earnings released helped HPQ price jump back up on Friday.
Our trade with mid strike $30.5 had a small loss but we placed an additional trade with mid price $29.5 was a winner. Net we made a gain on $46 on the back of a cost of $29. A 1.6x ROI on this earnings trade.
OPTIONS TODAY - TRADE STATUS ON BA DEBIT CONDOR
BA is now trading at $200. The initial jump above $205 on Wednesday had moved the trade to quite nice profits but these were quickly lost when the price wend down on Thursday and Friday. As we get closer to expiry on 15 March, we need to be nimble and close the trade as soon as we see the price goes up above $200 and towards $205 or higher. The losing side now is the Bull Call Spread +$200C/-$205C, while the Bear Call Spread -$225C/+230C is at profit as its premium is almost depleted. We placed a limit order of $0.03 to close the Bear Call Spread. Once we see a move-up in price and the Bull Call Spread goes into profit, we will close it too.
OPTIONS TODAY - POOR MAN’S COVERED CALL ON XLU
XLU is now trading lower at $61.72. The short call of $61 is ITM and our target is for it to close at $61 or below to generate the full premium. If price of XLU drops to or below $61 in the next 2 weeks, we may consider closing the short call for a profit and wait for XLU price to go higher towards $62 before selling a new OTM call.
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
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