Ever since the lower pivot high formed in the S&P 500 Index on May 10, the bears have been firmly in control. Any attempt to rally higher has been swiftly cut short making it quite difficult to profit from bullish trades. Until we experience a change in character I don�t see much of a need to do anything aggressive on the bullish side of things.
In last week�s article �Bear Threatens to Claw SPY,� May 18, on the SPDR S&P 500 ETF (NYSE: SPY) I suggested that options trading investors short a SPY Jun 137 � Jun 140 Call Spread. That is, sell the SPY Jun 137 Call and buy the Spy Jun 140 Call. Due to the neutral to bearish behavior of the SPY over the past week the trade has worked out nicely. In managing the position going forward traders may consider the two following ideas:
Stay the Course
Currently the June 137-140 call spread is worth $.20 with SPY at 132.30 this morning. Traders should look to close the trade once the spread value drops to $.10. At that point they will have captured the majority of the potential profit and the trade is no longer favorable. After closing the call spread traders may consider selling another out-of-the-money call spread following a rally in SPY.
Roll into an Iron Condor
Traders who believe the market sell-off is approaching a bottom may consider selling a put spread to modify the trade into an iron condor. For example, they could sell a SPY Jun 127 — 124 Put Spread for around $0.40. That is, sell to open the SPY Jun 127 Put while buying to open the Spy Jun 124 Put. Coupled with the existing call spread, this modifies the position into an iron condor poised to profit if the SPY remains between 127 and 137 at June expiration.
Sticking with the call spread will work out best if the market continues to exhibit bearish behavior in the coming weeks. The put spread will work better if the market remains in a neutral trading range.
At the time of this writing Tyler Craig owned short call spreads on the SPY.
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