SPY ETF Position Trading And Short Options Strategies

In this video, I want to go back through the SPY ETF charts from the previous position trading video, and discuss them further it in terms of our stock and options trading strategies.

Let’s also consider the following, and especially the differences between trading and investing:

  • Position trading –vs- investing with options protection
  • Counter trading from extreme to extreme
  • Stock and option combination trading strategies
  • Short option trading strategies

Volatility Problems When Selling Options

Volatility Problems When Selling Options

You are looking at charts from the previous videos:

(A)  This is where I bought SPY puts – the trade was based on the momentum extreme for timing, and was intended as downside protection for related long stocks in a portfolio.

How does this compare to our stock and options position trading strategies, like those that are being traded on facebook and yelp?

  • If I had been long the SPY, then I would have sold calls and bought puts as synthetic protection – based on the chart extreme
  • But there are volatility problems for selling calls and short options strategies

The combination of selling low volatility options, with a relatively long amount of time to expiration – gives less premium for the option sell, along with increased risk of short option going in the money.

  • 3-7 SPY 188.80 – apr 18 192c 1.10
    • Selling calls at 13.80 VIX
    • 6 weeks of time – 1.7% from price to strike
    • 3-26 Facebook 62.22 – sell apr 4 60 p 1.40
      • Selling puts at 43% MIV
      • 9 days of time – 3.7% from price to strike

(B)  For options selling, this would be a very good setup for a call short and/or for buying puts with it.  This is where I rolled my long march puts to april puts.

But again, you would have the problem with the time and premium on the call sell – and even if you would accept this, what would you do to protect the short when there was no move through the diagonal, and instead resumed the buy swing by breaking out through the previous pmd high.

The protection aspect of the options selling strategies would entail buying the SPY – and this is what I don’t want to do for the amount of premium I can get on the short call, compared to trading a stock like facebook or yelp.

(C)  I had spread off part of my long puts at this point on the SPY timing chart, which synced with a test of the position chart support.

And at this pmd low on the position chart, I spread off the remaining puts – but what about doing a put short?

  • 3-14 SPY 184.80 – apr 18 181p 2.40
    • Selling puts at 18.00 VIX
    • 5 weeks of time – 2% from price to strike

I would feel a lot better about this trade than the call sell, as a function of the increased premium and percentage to the strike – but you still need to sell with 5 weeks of time, which I don’t like for a trading strategy.

  • With long 188 puts at 3.05 – overselling 181 puts at 2.40 to create a ratio spread, would give you a 7 point spread at a 1.80 credit
    • Your breakeven on the ratio spread would become 172.20 = 181 short strike – 7 point spread width – 1.80 credit
    • The year low is 173.71 – and would hit as a shift line double bottom synced with the left side previous resistance at 173.60
    • This would be a 8.9% move from that pmd high
    • This could certainly happen, but I like this trade and expanding my downside protection
      • The issue would be protecting the short puts if it came to that – and by that time I would also be short the SPY against long stocks that I owned and other that I may have bought at lower prices on the move down

But like the call shorts, protection would be a possible issue for those trying to use the SPY for stock and options trading – and as discussed, I think the stocks like facebook and yelp work better for trading, compared to a relatively low volatility broad index.

Also consider if you had done an options short, where calls were sold at A – calls could now be bought at C to complete a ratio spread.  Here is what you would have accomplished:

  • 3-7 sell SPY 192 calls 1.10 – april 18 expiration
  • 3-14 buy SPY 186 calls 2.25 – april 18 expiration

So, it would appear for options selling that you would have a 1 sided strategy, selling puts only – I do not like that for a trading strategy.

If you want to trade the broad market directionally, you could use the position chart extremes for buying options synced with a faster trading chart for timing – with the intentions of spreading off the longs into the cheapest spread possible.

But as I have been discussing, I do not like using the SPY for our stock and options position trading strategies.