Thursday, August 12, 2010

SPY - Trading the Weeklies

SPY is trading $108.60, down 0.6% with IV30™ up 0.6%. The LIVEVOL™ Pro Summary is below.

We're going to continue our weekly skew analysis; we looked at trades in GS, SPY and AMZN already. This is another SPY.

Here's a quick link to the past trade recently.
UPDATE: Goldman Sachs (GS) - Closing the Weekly Trade

The strategy has worked because we have been able to sell 4 or even 5 options with high vol against one long lower vol option with the first weekly expiration wiping the slate clean for the first two sales. We hunt weekly skew, and then we hunt volatility smile skew.

Selling more options than you’re long does pose tail risk. For this reason, I prefer the SPY to any one company. A myriad of tail events which occur in companies, can’t occur in an index like bankruptcies, takeovers, lawsuits, frauds, special dividends, etc.

The Skew Tab from Livevol Pro illustrates the vols by strike, by month. Let's look at the vol differences between the weeklies expiring tomorrow and the monthlies expiring in six trading days.

The Options Tab (click to enlarge) illustrates the prices we're looking at.

Trade Analysis
Buy 1 SPY Monthly 110 put for $2.31
Sell 1 SPY Weekly 108 put at $0.47
Sell 1 SPY Weekly 106 put at $0.11
Total debit: $1.73

One word of caution, if the market falls apart tomorrow, this is naked short puts. And, when the market has disaster days, it tends to be on a Friday. We could also look to buy 1 Weekly SPY 104 put for $0.03.

This is trade analysis, not a recommendation.

Legal Stuff:

1 comment:

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