SPY at $169.50 is up 8% since 24th June due to short covering and fresh buying as the fear of immediate reversal of QE program subsided after Fed statement. The rally seems to have been sharp and quick and the upside seems limited from current levels.
Technically the 1 year chart of SPY suggest that the rally that started mid November had periodic corrections and after every correction the index moved up anywhere between 8% - 9% before another correction sets in. Traders can utilize this trend to generate more than 2% return in less than 26 calendar days by selling 173 Call option of SPY at current price of $0.64 as SPY is not expected to move beyond 173 in August Series.
Total Return from the Strategy
Assuming a trader is able to sell 1 lot (100) of SPY 173 Call option of Aug 2013 series expiring on 17th August at $0.64, the return and margin equation is as stated below.
Margin Required - Around $2550 (roughly 15% of trade value)
Total Premium Collected - $64
Brokerage and other charges - $10
Total Return from the trade = 2.11%
Note: It must be noted that since this is a naked call option if SPY closes beyond 173.54, there will be a loss of $100 on every dollar rise beyond 173.54.
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