Most retail traders buy calls or puts, anticipating the market will go up or down. The fact is 75% of calls and puts expire worthless on a week in, week out basis. The 'time' value built into the price of call and put contracts erodes quickly unless the underlying stock or ETF moves in the desired direction, and do so fast enough to offset the 'time' value. When this doesn't happen, as is often the case, the retail traders are left to hold the bag.
On the other hand, institutional traders are well versed in options theory and its practical applicability, and thus they use it to their advantage by mostly being 'sellers' of calls and puts ('premium' sellers), not 'buyers'. They know precisely what level above which to sell calls (strong resistance levels that are likely to hold), and what level below which to sell puts (strong support levels that are likely to hold). The secret to us making money is to behave like institutions.
Referring to the attached chart, this week's developing weekly POC (point of control) for the $SPY is around 235.30-235.40. Hence, I sold 200 x 235.50/236.50 credit call spreads for $30/contract, collecting $6K in credit. In effect, it's a bet on the $SPY remaining below 235.50 for the remainder of today's session (i.e., not closing above its developing weekly POC). As the day progresses and expiration nears, the further the price drops below 235.50 the better it is for us since it will allow us to close the position well before 4:00 p.m., while at the same time realizing as much profit as possible without running the unwarranted risk of holding the position through the closing bell.
For the remainder of the day, my sole task is to baby-sit the position, standing ready to bail out in a heartbeat should the market decide to prove me wrong.
Update #1 (11:17 a.m.)
The value of the 235.50/236.50 call spread has eroded by 50 percent. I could close it now if I want by buying it back at $15/contract. since I sold it at $30/contract this morning, I get to book a profit of $15/contract (excluding commissions, of course). Since the $SPY is trading near 235 as of this writing, the residual value of the spread is entirely 'time' value (aka. extrinsic value). In other words, the 'hope' that it will recover and move above 235.50 before the close is worth $15/contract as of this moment. But as the hope dwindles, so will the 'time' value.
I look forward to closing the position in the coming 1-2 hours for $5/contract or less. (Buy stop at breakeven or better).
Peter Ghostine (@peterghostine)
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