Option Spread Combination 08/10/2023

 A strong opening gap up quickly propelled SPY above our +/-2 point target move. SPY remained strong into the 10:00 hour, attaining a high of 451.70. After drifting mostly sideways for a short period, SPY started moving downward. By 12:30, SPY had relinquished almost all of it's gains for the day, dropping to 446.15 before attempting to rally. That attempt failed near the 448 level, with another leg down carrying SPY to the low of the day at 444.70. SPY rallied again to near the 448 level, but quickly fell back to the 445 level before rising slightly into the close.

Here you can see the price change for the day:

As you can see, SPY was up nearly 6 points after the opening. From there it fell to a near 1 point loss, rallied, and finished close to unchanged for the day.

This serves as an illustration for some of the thought processes involved in this method. My work indicates that SPY will move +/-2 points intraday an overwhelming majority of the time. However, a +/- 2 point move close to close is much less likely. By using 1 day option spreads, one can take advantage of this size move to realize a profit. The spreads are not meant to be held until close, and setting a pre-determined price level to take that profit is reasonable. For the purposes here I am using a price of $0.85 per spread as a profit level. In today's case, the profit level for the call spread was reached fairly early, whereas were it to be held to the close, it would have incurred a considerable loss. 

Another aspect of the advantages of taking a profit early was also showcased today. On reversal days, one can take advantage of both sides of the trade. Today's spread combination was put on for $0.79. While the $0.85 profit level for the calls showed only a small profit, the put spread increased in value as SPY fell, reaching a maximum value of $0.43, with ample opportunity to close the spread out for $0.10 - $0.30. 

This can be seen here:

SPY closed today at 445.91.The combination spread for tomorrow is:

Aug-11 447 Call / Aug-11 448 Call

Aug-11 445 Put / Aug-11 444 Put

The Call Spread at close was $0.36.

The Put Spread at close was $0.31.

Total cost = $0.67.

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