Today SPY gapped down over 2%, and so I looked at other times when SPY gapped down over 2% while the weekly MACD was down. The short term stats show a clear upside bias for about a week. The peak closing gains in the short term were 6 days out.
Looking at the options part of the assessment, based on my pricing model, an ATM call option purchase with 2 weeks until expiration would provide the maximum value play. The maximum expected value would be to enter the trade and set a limit order of 160% gain to exit.
Local maximum expected values occurred at 40%, 80%, and 160% limit orders. The stats below show the overall trade stats. Given the current market environment, I feel that the 40% or 80% limit order would be more appropriate for the market overhead resistance.
Which ever the case, they are positive EV plays, and the position sizing would vary depending on the exit limits. The Kelly Bet % will give guidance on that. And psychologically, an 80% win rate trade like the 40% limit order is nice in that it gives frequent wins and reinforces sticking to solid trades and planned exits.
This shows the stats for a 2 week till expiration ATM call exited with a 160% gain limit order. This gives the maximum expectation at 30% per trade.
This shows the stats for a 2 week till expiration ATM call exited with a 80% gain limit order. This has a higher win % at 66% but a little lower expectation.
This shows the stats for a 2 week till expiration ATM call exited with a 40% gain limit order. This gives the maximum win rate at 80% but a lesser expected value of 12-13%.
I personally took the trade and have the 40% limit gain order in place to exit, which would happen on only a partial fill of today's gap down within the next couple trading days.
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