SPY - Trading Weeklies

Discussion in 'Options' started by livevol_ophir, Aug 12, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    SPY is trading $108.60, down 0.6% with IV30&#8482 up 0.6%.
    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TGQQwefNxXI/AAAAAAAAEDM/GlxnmDGfruU/s1600/spy_summary_8-12-2010.gif">

    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.
    <b><a href="http://livevol.blogspot.com/2010/08/gs_11.html">UPDATE: Goldman Sachs (GS) - Closing the Weekly Trade</a></b>

    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 (<a href="http://livevol.blogspot.com/2010/08/spy.html">in the article</a>) 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 (<a href="http://livevol.blogspot.com/2010/08/spy.html">in the article</a>) illustrates the prices we're looking at.

    <b>Trade Analysis</b>
    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.

    Details, trades, prices, charts, vols here:
  2. livevol_ophir

    livevol_ophir ET Sponsor

    Here's the skew chart I'm referring to:

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TGQQwzi7HBI/AAAAAAAAEDU/TM5FVUDW554/s1600/spy_skew_8-12-2010.gif">
  3. So what is the exit?
  4. livevol_ophir

    livevol_ophir ET Sponsor

    1. A down day
    2. Next week selling more premium after weeklies expire; then get out on a down day, a vol day, or an unched day with premium collected.