Prices have gone straight up and option volatility levels have plummeted over the last few months. What strategy could benefit if prices back off a bit and option volatility levels increase? Also, if we are wrong and market heads up more , can I still have the potential to make money? The answer to the first question is a slightly bearish calendar and the answer to the second question is yes, we can still potentially make money on the upside if we are wrong , with a tweak I’ll show you.
Vehicle: SPY currently at 135
Strategy: Bearish Calendar Buy 1 April 132 put and sell 1 March 132 put for total cost of $1.25 ( $125). In a Calendar spread , you want the price to be as near to the strike price as possible. Your maximum risk is what you pay for the calendar.
Plan: ( Downside) Over next 7-10 days if SPY is between 130 and 135, the spread has a good chance of yielding 10-15%, more if Implied Volatility increases. When I am up 10-15% after commissions ( I am using $1.50 per contract and have no ticket charge or minimum), I will get out. I won’t let stock go under 130, will merely take off .
Plan: ( Upside) If SPY trades over 137.5 the next 7-10 days I will add another calendar at the 139 strike. That will give me an upside breakeven point of around 141 and room to breathe.
Have a great day!