Thursday, October 28, 2010

Bookkeeping: Selling SPY Calls

POMO you very much for the profit.

Mindless buying at the 13 day moving average continues to work non stop.  Eventually this trade will blow up - one will lose money - perhaps a good amount - by closing their eyes and buying without thought on each dip.  But the traders play the same pattern over and over until it breaks, and the key is to make as much money in the meantime until the change in trend, so those gains offset the loss that will eventually happen.

This morning before the jobless claims figure futures were up right on schedule nearly half a percent.  Ironically a "good" weekly claims number did not improve futures much - remember good news means the scary thought of less QE in 2012-2015.

Anyhow in my book this is a perfect trade - gaining nice profits with risk capital exposed to the market for a short period of time.  This trade was held for 2 market hours - the only way it could have been better was if the trade happened in one market day, and there was zero overnight risk, but since we're POMOinsured, I guess overnight risk no longer is a factor either.

These SPY 118 calls were entered at $2.22; this morning with the S&P 500 just over 1187 they trade at $2.68/$2.69 where I will liquidate.   That is 20.5%ish return for 2 hours of risk (on 4.5% of capital).  Can the market go up from here?  Yes! (per fed decree)  But that's not the point.  This was the goal of the trade - get my 6-12 S&P points, and we are here at the top end of the recent range; and it happened with a short duration, limiting risk.  If we break to new highs we can always re-enter the trade.  As I wrote in the weekly summary we look destined for a test of highs of the year at S&P 1220 so I might be right back to this trade shortly.

No position


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