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Friday, September 19, 2014

Spiders (SPY) August Ratio Spread (Options)

7/25/2014 (RD)

This is a ratio put spread (has the highest probability of success).

buy (to open) 3 August 2014 $197 puts at $1.61
sell (to open) 6 August 2014 $196 puts at $1.31 (62% probability of success)

The Lesson:
Why do a ratio spread on 7/25?
SPY was at the "top" of the stochastics (it's "overbought"), so it was likely to reverse back down in the near future.
See chart.

I decided to sell (to close) the "debit spread" portion of the ratio spread because it was profitable on 8/4.
sell (to close) 3 August 2014 $197 puts at $3.33
buy (to close) 3 August 2014 $196 puts at $2.66
Received credit of $0.67

The Lesson:
SPY was "oversold" on 8/4 (see chart), so it's likely to reverse back up.  If it does go back up, I'll lose all the profits on the debit spread.  

But then......SPY may continue to drop, so the debit spread will become more profitable.  

So..... sell the debit spread on 8/4 and take my profits or leave it open for the possibility of making more $$$?  As traders, we're always faced with tough decisions.  

As Jim Cramer would say, "Nobody ever got hurt by taking profits!"

8/8/2014 (roll to Sept)
With 6 trading days remaining, I decided to roll my ITM August puts (see chart) to September to avoid assignment and to collect another credit.
buy (to close) 3 August 2014 $196 puts at $4.20
sell (to open) 3 September 2014 $195 puts at $5.67
received new credit of $1.47 

9/19/2014 (expiration)
SPY closed at $200.70, so my Sept $195 puts expired perfectly!

Here's all the math:

+1.01 (initial ratio spread)
+0.67 (closing profitable debit spread)
+1.47 (roll August to September)
 $3.15 x 3 x 100 =  $945 (gross)

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