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Wednesday
Dec162015

SPY Mar16 $192/$187 Vertical Put Spread: 4.51% Profit Banked in 132 Days

The 178th trade that SK OptionTrader closed was a vertical call spread on SPY, the ETF that tracks the S&P 500.

Trade: Short SPY Mar16 $192/$187 Vertical Put Spread 

Entry: $1.01 

Exit: $0.83

Return: 4.51%

Opened: 29-Jul-15

Closed: 8-Dec-15

Days Open: 132

One of the strategies that we have employed this year is to sell downside protection on equities, which takes advantage of the Global Central Bank Put being in play. Therefore during late July we looked to sell vertical put spreads on SPY, the ETF that tracks the S&P 500.

We held the view that the S&P would be unlikely to fall below 1920, and that any decline below that would likely be short lived. This translated to a level of $192 for SPY. In terms of the time frame we intended to give ourselves considerably leeway to allow equities to bounce back from any possible corrections. Therefore we looked to use puts expiring approximately 8 months out.

On July 29th we signalled to our subscribers that we had sold SPY Mar16 $192/$187 Vertical Put Spreads for a net credit of $1.01. This means that we sold SPY puts with $192 strikes and simultaneously bought SPY puts with $187 strikes, both with March ’16 expiries.

If our view was correct, then the spread between the prices of the puts would narrow to $0.00 from $1.01. However, if we were wrong we could have lost the maximum downside of $3.99, the difference between the strikes of $5 minus the net credit of $1.01 received. The simple payoff diagram below illustrates this.

Our downside risks were almost four times our potential returns, but due to the Central Bank Put being in play we viewed the probability of the S&P making and staying below 1920 as particularly low. This resulted in the trade having positive risk reward dynamics, as our expected losses were far less than our expected gains.

Equities made neutral movement until mid-August, when concerns around economic growth in China rocked markets and triggered a correction. This selloff saw this position show considerable losses for a significant amount of time. However, the long dated expiry allowed us to weather this correction and wait for markets to recover again without being forced to realise the losses.

After the recovery we continued to hold the trade while the time premium of the puts eroded, increasing the value of the position. Ahead of the December Fed we chose to exit the trade to reduce the event risk to our portfolio, resulting in a modest profit of 4.59% being banked.

While this trade has not performed as well as we had hoped, we are pleased that its design has allowed us to bank a profit, albeit a limited one. A short vertical call spread is a bullish trade, which means that we were long equities while holding this position. However, the S&P has in fact moved lower over the same time period that we had the trade open, while we have banked a profit. Therefore, although we had hoped for greater gains to be made, we are satisfied with how this trade has performed.

SK OptionTrader Trading Record Summary

Number Of Closed Trades: 178

Average Return Per Trade: 28.14%

Average Duration Per Trade: 57.96