DailyPlay – Opening Trade (SPY) – October 4, 2022

SPY Bullish Opening Trade

View SPY Trade

Strategy Details

Strategy: Short Put Vertical Spread

Direction: Bullish

Details: Sell to Open 10 Contracts Oct. 14th $362/365 Put Vertical Spreads @ $1.13 Credit.

Total Risk: This trade has a max risk of $1,870 (10 Contracts x $187).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a bearish trend. 

1M/6M Trends: Bearish/ Bearish

Technical Score: 5/10

OptionsPlay Score: 87

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that if there is a multi-leg option strategy, it should be entered as a single trade. 

Please note these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. This will be reflected in the Portfolio tab within the OptionsPlay platform.

Investment Rationale

Yesterday’s rally didn’t come out of nowhere.  It came from Friday’s new 2022 lows that were done at end of month/end of quarter/and an expiration day. It also came on a daily Sequential -12 signal, upping the odds quite a bit that Monday would be a -13 count (which it was, and the first daily standard Sequential -13 reading since May 12 – almost five months ago).

SPX – Daily

The first question to ask oneself – after seeing a rip higher like we did yesterday – is “Has anything changed the bigger story?” And the answer to that question was found in looking at the charts showing the dollar’s rally further falling beneath the 112.63 target we’ve had, and bond yields continuing their pullback from last week’s 4% high. Those two non-equity markets – that have so much to do with how equities have traded this year – both gave reasons to be buying yesterday. Or at the very least, suggesting one not press the overall bearish bet at that place and time.

The second question is how much duration does a potential rally have? Was this a one day affair, with today going to give it all back like what happened last Wednesday and Thursday? Does it last a few days? A week? A month That, of course, is the bigger and more important question to decipher. To me, that answer can only come by also seeing what rates and the greenback do going forward, for their inverse relationship to the stock market is still quite prevalent and will likely be so through year’s end.

Right now, the dollar has hit an important target and halted – at least for now. The bonds hit an important target and halted – at least for now. The SPX hit its 200-WMA and saw but a one day breach of the June lows and halted its decline – at least for now. So, watch for any of these two non-equity benchmarks to continue their declines or to properly break above them and you’ll likely have the direction the stock market will go. At least for now.

I’ve looked closely into Monday’s SPY price action and have determined that if a pullback is going to hold, the SPY should not get lower than the $364.50 to $362 zone. Use that as a potential bullish area to buy today or tomorrow on an intra-day decline. So, turning this into an actual trade idea, let’s sell the short-dated October 14th SPY $365/$362 put spread when/if we see a pullback into this zone. (On Monday this spread closed at $1.14, but it will be higher when/if we get filled.)

I’d suggest you do this trade with more than one entry price, rather than picking the midpoint (i.e., just in case it doesn’t get to $363.50). So put some on near each of those 4 whole dollar levels to try to get an average entry at $363.50, but having something on should it, let’s say, only pullback to $364 (in which case you’d still have some partial bullish exposure on).

If I’m right that sometime in October we’re going to see the SPX mid-3400s trade, I don’t want to go out to any further expiration date for a bullish play from the current SPX level (which is now some 200 points higher than that target zone).