Simple, Low Risk S&P 500 Option Trade

Market Summary

The January 10^th Investor Report mentioned "...Stocks finally broke out their months long trading ranges and the major indexes settled at the highest levels in five months. Investors are setting aside worries about European debt problems and focusing more attention on the upcoming earnings season. Traditionally, company earnings announcements will lift the market higher, especially if there are no major earnings disappointments. The SPY chart down below will confirm the price breakout. The SPY is an exchange traded fund (ETF) that seeks to replicate, net of expenses the S&P 500 index. The index is composed of 500 selected stocks, and spans over 24 separate industry groups. It is heavily weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The fund holds all of the S&P 500 index stocks. It is comprised of undivided ownership interests called SPDRs..."

Investor Analysis

The January report also said "...As mentioned above, with the beginning of company earnings announcements, stocks upside breakout might have legs. After being stuck in a many months long trading range the market appears primed for an upside move..." Stock prices appear to have confirmed an upside move; there are several simple trading strategies that can take advantage of this opportunity.

Possible Strategy

Investors can consider a credit spread strategy to benefit from the upward push in stock prices. A simple trade is to sell an out-of-the money (OTM) stock or option and protecting yourself by simultaneously buying the exact same investment, but even further out-of-the-money (OTM).

For example, selling the February $134 strike price SPY call option for .83 (yesterday's closing price) and simultaneously buying the February $139 call at .12 would generate a .71 per share credit to your trading account (.83 minus .12). You get to keep the .71 per share credit (multiplied by the number of shares represented by the option contracts) if the SPY closes below $134 on February 17^th. Sign up for the http://blog.theoptiontrader.com for additional option trading strategies.

By Gregory Clay