The Daily Market Forecast... a better credit spread
Monday’s Blog Results: Price moved plenty, but the levels were wide apart. No trades were triggered for the Volume Profile. strategy. Team Members took up the slack trading oil, gold & S&P using Volatility Reversal and credit spreads on the SPXW using Volume Profile.
Today’s Trading Tip: Better credit spreads.
Same-day expiration credit spreads are extremely popular trades for income generation. As in all trading there are many ways to find edge.
If you’re not familiar with the trade here’s a brief explanation: You select a price level on the chart that you believe price will NOT touch today. For the Bear Call spread that level would be way above current price. For the Bull Put spread that level would be way below current price.
The trade is entered by selling a call/put for a credit and buying a protective call/put for a debit. You will net the difference. Your maximum risk on the trade is the difference between the strikes less what you were credited on the spread.
That’s a mouthful so let’s look at the numbers. A typical net credit may be $40 or so. With the spread being $5 wide and the option representing 100 contracts that means you’re risking $460 to make $40. That is a poor reward/risk ratio. The only way that trade is worth taking is if it rarely loses.
You can get more net credit to make the reward/risk ratio better. But that means you’ll be setting the trade closer to the current price increasing the risk of failure.
Your skill in determining the price levels is key. The better you are at picking turning points the more credit you can get without increasing your risk of failure.
Using Volume Profile is a great way to do that. Looking at the chart above you’ll see horizontal lines displaying where the most institutional volume was traded. Volume at price, not in a time interval. These “hidden” levels tend to be great reversal and breakout triggers. By adding this analysis to your credit spread selection you’ll be gaining some edge. This is one of the factors we look at daily in our trading room.
Today’s Best S&P Futures Turning Points:
Short Level: Sell 4683.75 stop 4688.50 (4.75 risk).
Long Level: Buy 4594.50 stop 4588.75 (5.75 risk).
Trade Well,
Mike Siewruk
P.S. Join us every Saturday morning @ 10:00 ET for our weekly LookBack (5) trade review session. Every trade for the week is analyzed. Now open to the public. Meet the team. Ask questions. Register here for the December 11th session.