SPY ETF Position Trading With Option Spreads

In this video I want to discuss position trading the SPY ETF with option spreads after a position chart extreme, along with how these trading strategies would be approached differently than the short options strategies traded on Facebook and Yelp.

We haven’t done as much with ETF trading as I had expected, for a few different reasons:

• I really haven’t gotten consistent renko settings for the different ETFs for trade setups
  • There are a lot of price envelope reverses that never have a trade setup, and a lot of the setups happen during ETH
  • Volatility has been so low on average that it has been a problem for options selling strategies

We are going to talk about volatility and the VIX, along with trading VIX options, in a follow-up video to this one.

So, my ETF trading has essentially been from the 60 minute position chart, with some options collars if I have an open ETF trade.  But most ETF options trading has been simple long options and/or long options spreads, similar to what we are going to discuss.

SPY ETF Position Trading Chart

(1) You are looking at a combination of a 60 min position chart, with a 1280 tick timing chart.  After the pmd high and mex cross, I decided to buy a 188-182 march put spread – 182 would be a move down of around 3.5%, after the high, and there is a daily shift line at 181.75-181.34.

You can see my question on the chart:  After the position chart momentum extreme PMD high, with the mex cross – could this trade have been done as a long put-short call?

• Absolutely, and would have been if I was long the SPY or long SPY calls that have not been spread off
• But I am trying to show you a position protection strategy that takes advantage of low volatility and has no naked short exposure
  • Even though my portfolio may be correlated to the SPY, it isn’t to the extent that I want short uncovered calls
  • If I want to sell calls, I would do it against the individual long positions
  • For short strangles and ratio short option strategies – I think stocks like facebook and yelp are more effective than relatively low volatility ETFs
  • 3-7 buy mar 188p 1.78 – 1280 tick yellow square1
  • 3-7 sell mar 182p .48 – 1280 tick yellow square2

(2)  3-10 support test partial profit

• 3-10 sell mar 188p 2.46
• 3-10 buy mar 182p .58
  • 1.88 – 1.30 = .58
  • Does .58 seems like a small partial – it’s 45%

(3) Retrace up from support and then on the 1280t res-sup failure break with diagonal breakout potential – I went ahead and added back to the march puts, along with starting an april put spread.

NOTE:  You may be wondering why the put spreads and no call spreads – remember that these trades are counter trades from the 60 minute chart extreme, along with being a way of protecting other stock and ETF longs that have correlation to the broader market.

• 3-11 buy mar 188p 1.64 – 1280 tick yellow square1
• 3-11 sell mar 182p .41 – 1280 tick yellow square2
  • I was ready to spread at the pmd low and used the blue line from the pmd counter point as the hold
  • 1.23 replaces the initial spread at 1.30
  • 3-11 buy apr 188p 3.05 – 1280 tick yellow square1

(4) I didn’t spread off at the same time as I did with the march put – this is a function of having more time to expiration

• 3-12 sell apr 180p 1.55 – 1280 tick yellow square1
  • The spread price becomes 1.50, it would have been 2.02 without the timing
  • This may not seem like much, like the amount of the partial, but you have to recognize the distance [delta] of the out of the money option being sold
  • And you have to look at this as a percentage – this is right at a 25% spread price improvement

(5) Friday 3-14-2014

The put trades worked well with the market down all 5 days, along with the additional pressure from Crimea.

With the april put spreads in place, along with next week being march expiration and having little time left if there isn’t any more downside after the 5 down days – I went ahead and took a partial profit for the april spreads and closed my march put spreads:

• Sell march 188p 4.31
• Buy mar 182p 1.32
  • 2.99 close – 1.26 avg cost = 1.73 profit = 137%