SPDR S&P 500 (SPY) Bear Call Spread: Trading the Broad Market

If you follow our Option Trading Alerts you would have seen Tuesday’s alert to sell upside call spreads in the S&P 500 Index (SPX), both as a high-probability credit spread, but also as a hedge to our net long delta position.

More News On SPY

• SPY

• ETF Preview: Energy, Energy Services Funds to Get Lift From Exxon Mobil Earnings
  July 29, 2010
• Mid-Day ETF Update: Mostly Lower As Broad Market Eases on Weak Durable Goods Orders
  July 28, 2010
• ETF Preview: Financial Funds Leading Broad Advance
  July 27, 2010

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This SPDR S&P 500 ETF (NYSE: SPY) call credit spread also offers a relatively high probability of success based on the expected movement of SPY until February expiration. The trade is certainly not without risk, but offers traders a limited-risk, moderately bearish- to-flat view on the SPY. It can also be used as a partial hedge against long positions in your account as things begin to look slightly less rosy.

SPY Credit Spread Trade Details:

Then SPY is currently trading at $112.60.

Credit Spread/Bear Call Spread–

• Sell the February 117 call (out-of-the-money) for $0.50 per contract.
• Buy the February 120 call (out-of-the-money) for $0.13 per contract.
• Net credit of $0.37 per spread

Profit/Loss Details:

Maximum Profit: $0.37 (the credit collected). This excludes commissions, though exit commissions will not be required if both calls expire worthless.

Maximum Risk: $2.63 (the difference between strikes minus the credit collected). Reward on risk is approximately 14% in 29 days.

Breakeven: $117.37 (the strike of the lower call plus the premium collected).

For more on SPY:

Sellers in Pfizer, Cliffs Natural Resources as SPY Gains

Market Drops Following CPI, J.P. Morgan Earnings Spark Selling

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