SPX weekly Calendar Trade

With the volatility once again in a lower range I like the success  possibilities of  an SPX weekly calendar today. I am looking at the trade below:

Sell 1 SPX June 2nd 2395 put
Buy 1 SPX Jun 16 2395 put
Debit for spread is approx. $9.00 with SPX trading at 2395
Total cost per spread at this level would be $900 plus commissions. Looking to close trade at a 10% gain or 10% loss. If you get filled at $9.00 immediately  place good to cancel order to sell at a profit at $10.00. Close trade at a loss if you are down $100 on the spread.

Live Trade for today: Call Credit Spread in SPX

With SPX currently at $2393, about 12 points from the all time highs, I am looking at a Call Credit Spread. I am looking at a 24 day trade in the June 16 expiration. Sell 1  2430 Call and Buy 1  2440 Call for an $1.90 Credit.  Just filled this trade   live at 11:35 am central time with SPX at 2393. The Delta of the short call is 20, that means  there is only a 20% probability that SPX will finish over the short strike of 2430 in 24 Days. The margin or risk on this trade is $810. I am looking at making around 10% or around $80 on my risk capital of $810 for every 1 contract. I will have an order in to buy back the credit spread at $1.10 Debit as a profit target. If SPX continues up, I will have an order in to buy back the spread at 2 times my profit target of $80. So I will buy the credit spread back for a loss if the credit goes from the initial $1.90 credit to $1.90 plus $1.60 or $3.50. Always have a Plan before you start each trade! The position Greeks of the Trade for every 1 contract:  Deltas -6.66  Gamma  -.14  Theta  6.22  Vega  -40.42.

What is Implied Volatility and how can it help me?

AAPL is at $155 today. The at-the-money 31  Day Call in the June 16 Expiration is trading at $3.30 with an Implied Volatility of 17.41.

What is Implied Volatility ?

In the above example, the market price is $3.30. The 17.41 Implied Volatility is the input you put in the Options Pricing pricing model that spits out the market price of $3.30. If I put in 15 into my pricing model, it might spit out a price of $2.00. That wouldn’t be the Implied Volatility. Remember, Implied Volatility is the input you put in the pricing model that equals the current market price.

How can knowing Implied Volatility help me? Now that I have the implied volatility number as a metric of the current option price, if I can compare the number to Historical numbers ,  it will mean something useful. The Historical Implied Volatility Range in AAPL over the last year is around 11-29. Now having some Historical perspective, historically, I can see 17 is in the lower end of the range.

A Practical application is this: If I am bullish , buying a Call at around 17 volatility isn’t a bad buy from a Volatility perspective. Analogy: It’s like buying a pint of raspberries at Grocer for $7. I come home and ask my wife if it was a good buy. She grimaces! She says” The range over the last year for a pint of Raspberries is $2- $7. I paid the top!

Dan Sheridan

dan@sheridanmentoring.com