This week again was a very nice week. Both trades were profitable and had very good profit percentages. The trend for both indices used this week was definitively downward with a great fall from Monday with little movement up and down for the rest of the week. This dictated yet again the use of call options for the spreads.
SPX
Here is the SPX PM Settled Chart for the week ended 12/16/2011. The top line is the 1245 level where the lower end of our spread was. The second line is the trend line for the week. As you can see the overall trend is significantly negative or downward sloping. That was our determinant to use call spreads. Here is the process I went through for getting into the SPX Call Spread for the week:
1. After checking my usual indices (SPX, RUT, NDX) I ruled out the RUT as didn’t have the ROI I like to get.
2. After deciding on the SPX I start looking at the trend line. When I was looking Wednesday the trend line was decidedly down, so that steered me to Call options.
3. Next I look at least 1 – 1.5 Std. Deviations from the current strike price.
4. The 1245-1255 Spread works as this was what I call the “tipping point” spread. The spreads above this tipping point: 1255-1265 and higher the ROI drops dramatically.
5. Using the probability calculator the 1245-1255 spread gave us an 88% probability that the underlying would not touch our lower spread value, so we went with it.
Here is the trade:
SPX 1245 Call $1.09
SPX 1300 Call $(0.46) This gives a Net Credit of $0.63 or 6.3% ROI
NPX
A look at the chart will show that the NDX basically followed the pattern of the SPX chart with a significant downward trend for the week. This is something I have seen in the chats for most of the year, especially around options expirations week, which last week was. The horizontal line is the 2285 line which is the lower limit of our spread. The other lines show the trend for the week. Since I had a tipping point spread with the SPX I looked for one with the NDX, and I found one. Here is a rundown of the trade:
1. Ran through indices: SPX, RUT, NDX
a. Already made the SPX trade and ruled out RUT so NDX is the way to go
2. Looked at technical on the chart and getting ourselves at least 1 – 1.5 Std. Deviations away from the underlying strike price
3. 2285-2295 Call Spread fits our bill. This spread was the “tipping point” or the point between where the spreads have good value and where the spreads have very little value.
Here is the trade:
NDX 2285 Call $2.72
NDX 2295 Call $(1.99) This gives a Net Credit of $0.73 or 7.3% ROI
The SPX & NDX trades together gave me a blended 6.80% ROI this week on invested capital. So for every $1,000 I invested this week I returned $68.00. I will take this any day of the week.
I have some questions that I have answered that I will put up later tonight. I am battling sporadic internet outages today and getting the pictures and images I want to put up just isn’t happening right now.
If you have any questions or comments you can:
1. Leave a comment below
3. Tweet me on Twitter: @awagel01
Charts are courtesy of the FREE site freesctockcharts.com
TTFN
Ash
DISCLAIMER
The information I put up here is accurate and actual, but historical. My point is to show the trades I do each week, both good and bad, and how I make my trading decisions. If you choose to use the same credit spread strategy I do that is great! But I am not recommending actual trades here or on my Twitter feed. I am only putting up what I do for the information and education of the public. If, after doing your own due diligence and research you think my trades will work for you, then great, but realize I am not recommending anything. The choice is yours.
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