Why was Wednesday a great day to sell premium (puts or calls)? First, the market was getting whacked early so if we expect it to turn (there was no big news to account for the selling) which side would u be selling, calls or puts? The puts, right? Because they are filling up with value as the market is declining and we want to sell it while it has value. Picking the strikes is tricky but I use a combination of charting, technicals, open interest and volume to make my choice…along with high probability and common sense!
This July 4th holiday is very similar to the trading hours during Thanksgiving Week.
I chose the SPY 161/159 weekly put spread to sell for about 73 cents; I did not want to have too much risk on the table so my trade was 35 times in 3 accounts. My total risk is $2 if the stock is under 159 by close Friday. I’m on the hook for 1.27 along with the premium I collected (or two bucks), but I can always roll it out to next week (I have ‘options’) or buy it back prior to the end of the day. My breakeven is 161 less the premium I picked up, or 160.27. So, it’s nearly 1:1 risk.
How about timing? Why was it ideal? When I am short premium time is on my side, the less time the market is open the better for me. However, in order to maximize my return on the trade I have to be willing to ride it all the way to expiration or close to it! Ask yourself before you try this, can you hold it that long? With a half day trading Wed and no trading Thursday I only have to deal with one trading day before expiration, right? I love thse odds, because when others are in a panic I’ll just take in high premium, let the time work for me.
So as I sit here on July 4 enjoying BBQ I can take heart that my put spread erodes EVEN if the market goes sideways…but if it goes higher (because the 161 short put is out of the money now). As long as the SPY stays over 161 Friday we’ll see that spreads erode and then I have ‘options’. I can let it expire; I can buy it back for pennies (my preferred move) or just buy back the short strike if there is some value.
The VIX made its high early on Wednesday and collapsed throughout the day, ending below a key 16.6 level. We normally see the VIX collapse in front of a holiday but then pick back up a few days later. While the looming jobs report may wreak havoc the VIX activity is telling us the market is sanguine about the results (good or bad).
Make sense?
Learn more about Lang and his work here.
