It?s time to teach some old dogs some new tricks.
This is a bet that the S&P 500 does not climb to a new all time high by the November 21 expiration in 24 trading days.
I think that we need to chop around here a bit and consolidate within a wide range before the (SPY) starts its New Year run to all time highs.
Not wanting to leave a single penny on the table, I want to profit from this likely outcome. Therefore, I am adding a short position in the S&P 500 (SPY) November, 2014 $197-$202 out-of-the-money vertical call spread this morning.
The maximum profit point for this short position is anywhere below $197 in the (SPY), which is above the 50 day moving average. That is 5.7% above the Friday close.
When you sell short a security, your broker places the cash proceeds in your account, and leaves it there as collateral for the position. You give it back when you come out of the position at a later date, hopefully a lesser amount when the trade is profitable.
As long as the (SPY) doesn?t close above $197, you will be able to keep the entire $0.49 premium that you received in cash on the short sale. This cash you receive will be immediately credited to your account and left there until the options expire.
The upside breakeven point for the position is $197.49 (The $197 strike, plus the $0.49 premium you took in on the initial sale).
You can sell short this vertical call spread anywhere in a $0.40-$0.60 range and have a reasonable expectation of making money on this trade.
This is a new kind of position for my Trade Alert followers. It has exactly the same risk profile and margin requirement as buying an S&P 500 (SPY) November, 2014 $197-$202 deep in-the-money vertical put spread.
It does also give us some downside protection with which we can protect our existing long positions in case the market decides to take another swoon. We are just one US Ebola case from the next 300 point plunge in the Dow Average, and there are certain to be more. There is no shortage of morons on this earth.
If the (SPY) has already put in its final bottom and continues to appreciate, you will think you have died and gone to heaven, because your remaining substantial long positions in (BAC), (SPY), and short in the (FXE) will cause your P&L to soar.
You might then take a small loss on your short (SPY) call spread. But then, nobody complains when they buy fire insurance and their house doesn?t burn down. In the meantime, you get the benefit from time decay on this position.
Why am I doing this, other than to educate you on some new tricks of the trade?
Liquidity for deep out of the money puts has become so poor, and the market dislocations so great, that I can actually make more money now on shorting call spreads than buying put spreads, even though they are mirror images of each other.
If you don?t believe me, then try pricing out the (SPY) November $197-$202 deep in-the-money vertical bear put spread and see what you get. Mathematically, they should be the same. But the bid and offered spreads on the puts are wide enough to drive a Ferrari F-50 through.
It's the market makers way of reaching into your pocket and lifting out your wallet.
If all of this sounds too complicated, then just stand aside and watch how this position plays out. Then, maybe you can do it the next time, if conditions permit.
