Tuesday, August 25, 2015

SPY Analysis

Update 9/10/2015: The cost of exiting SPY declined to a $0.10 premium debit and I closed the position for a profit to avoid additional time risk.

Shares rose by 0.7% over 16 days, or a +16% annual rate. The options produced a +450.0% yield on debit, for a +10,266% annual rate.

The S&P 500 exchange-traded fund SPY rebounded on Tuesday, the day after the China Crash. I'm considering a direction neutral position with a wide zone of profit in anticipation of a sharp decline in volatility.

No trading signal. No earnings, obviously. This is a pure volatility play.

[SPY in Wikipedia]


I shall use the SEP series of options, which trades for the last time 24 days hence, on Sept. 18.


Click on chart to enlarge.
SPY at 10:10 a.m. New York time, 30 days hourly bars
Implied volatility stands at 32%, which is identical to the VIX, a measure of volatility of the S&P 500 index. SPY’s volatility stands in the 66th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

Iron condor, short the $205 calls and long the $208 calls,
short the $170 puts and long the $167 puts,
sold for a credit and expiring Sept. 19.
Probability of expiring out-of-the-money


The premium is $0.55, which is 18% of the width of the position’s wings. The stock at the time of purchase was priced at 193.98

The risk/reward ratio is 4.5:1.

The zone of profit in the proposed trade covers a $17.50 move either way. The average true range on the last up day intra-day before Monday's China Crash was $2.06, so the zone is equivalent to about 8-1/2 days of movement.

Decision for My Account

I've opened a position on SPY as described above.

-- Tim Bovee, Portland, Oregon, Aug. 25, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.

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