Newb Options question

C

ChkitOut

Lets say you're speculating SPY will drop 4 dollars from 83 to 79 in the next 5-10 business days.

What spy option would you want to buy or sell to get the most profit from that move?
 
One way to play this: Buy the front month ATM put. Once the SPY has made its expected move, buy the SPY (underlying). This works well the week of expiration--which I am assuming is your time frame. If the SPY moves against you, you lose the PUT premium (for all intents and purposes). If the SPY moves the desired amount and keeps moving down after you buy the underlying, you have locked in a profit of four points minus the amount of the premium paid. If the SPY rebounds, then you make money on the long SPY position minus the premium paid. Otherwise, I would just short the SPY and set a stop loss.
 
Quote from jwcapital:

One way to play this: Buy the front month ATM put. Once the SPY has made its expected move, buy the SPY (underlying). This works well the week of expiration--which I am assuming is your time frame. If the SPY moves against you, you lose the PUT premium (for all intents and purposes). If the SPY moves the desired amount and keeps moving down after you buy the underlying, you have locked in a profit of four points minus the amount of the premium paid. If the SPY rebounds, then you make money on the long SPY position minus the premium paid. Otherwise, I would just short the SPY and set a stop loss.
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I have done this strategy on expiration. It is really good. What you essentially do is keep moving back and forth from being long a put, and then reversing to long a call (via the buying of the underlying).
 
Quote from riskfreetrading:

If I were you I would have sold the 79 ITM call, because if your timing is not perfect, you can get the put premium that corresponds to strike 79.
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There are two serious problems with this trade suggestion:

1) Upside risk is unacceptable for most traders

2) Profits are limited. I know the op was only looking for a 4-point move and thus, not seeking a huge profit.

In addition, some brokers do not allow investors to sell naked call options.

Mark
 
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