Thursday, February 9, 2017

Put Option Trade Opportunity in SPY, 2-9-17

Click on Table to Enlarge

Currently with today's action I have run some scans and there is a significant opportunity here, though with a smaller sample size on the past instances.

The scan criteria was:

  • SPY at 52 week high
  • VIX closes less than 15
  • VIX closes down 5% or more on the day
Only 11 instances show up, but the skews over the next couple weeks are negative and provide profit opportunities.  8 out of the 11 past instances showed gains of 80% or more over the next 5 trading days, when buying an ATM option with 5 trading days until expiration.  This is based on the model I have programmed, NOT on actual past contract data.  But the model is probably slightly conservative on average in the theoretical returns calculated, because almost the entire time value of the option is stripped out of the result.

So a simple trade opportunity here on the options would be a SPY 231 put option with a Feb 17th expiration.  Limit order for entry 1.00.  Exit limit order 1.80 after entry.

All 11 instances in the back test traded higher the next day relative to the closing value.  So expect there to be at least a very small drop in the option value tomorrow relative to today's close.

Another point of note here, even a couple instances on the list where the decline was only about 0.5%, showed a 80% gain in the option value.  So the implication is that with the VIX this low, even a small drop could pop the VIX a few points.  And by the numbers on it, SPY would have to decline less than 0.5% to reach the break even point.  7 out of the 11 past instances declined over 1% which would be ~100% gain or more on the option.

The ETF side of trading also shows a profit opportunity but the volatility being so low, the absolute return expected is rather marginal over the short term.  Looking out 2 months though, given that the downside risk is anticipated to be greater than upside potential, a conservative play here would be the inverse ETF play.

Basically, setting a 3.25% limit gain on a SPY short along with a 3.25% stop loss on it, and exiting at 2 months from the open of the trade if not already exited by the limit orders, would produce about a 1% expected value on SPY.  Using a 3x leveraged ETF may increase the expected value by around 3 times, but the stop and limit orders would have to be adjusted by 3x% as well.

But let's say the market does falter 3% in the coming couple months, the 3x ETF could rise 9-10% while the market turns negative.  That would be a very nice swing in an account versus just holding.

Let me know if any other info is desired here.


1 comment:

  1. I modified the scan slightly based on the final closing data. VIX was down more than 4.5% and VIX closed less than 13. the results were on par with what was posted earlier a little before the close.