NEW TRADE

September Call Spread September Put Spread

Buy 1365 calls Sell 1360 calls  at a spread of +0.90 Sell 1210 puts Buy 1205 puts at a spread of +0.60

Allocate one call spread per $13,000 Allocate one put spread per $13,000

Time to expiry:	33 days (September 19)
Premium received:	+1.50pts ($375)	Maximum risk:	+3.50pts ($875)
Probability of profit:	74%
Initial margin:	$923
Allocation:	1 of each spread per us$13,000
Contract details:	www.cme.com

 

Commentary
Last week's trade went unfilled. This week we have adjusted the strikes, while maintaining around the same profit potential and improved the probability thanks to a little time decay and a drop in volatility.

For the September call spread, we recommend selling the 1360 call and buying the 1365 call at 0.90pts. For the September put spread, we recommend selling the 1210 put and buying the 1205 put at 0.60pts.

Order Placement: "In CME September S&P500 futures options, sell the 1360 call and buy the 1365 call at a credit of 0.9pts, X lots. In September puts sell the 1210 put and buy the 1205 put at a credit of 0.60pts, X lots."

Trading one of each spread for every $13,000au in your account is recommended.

Note some brokers will only accept spreads with no more than two legs, hence the call and put parts are written here as two separate spreads. If however your system or broker allows for four legs, then simply place the whole four options on at one price - a credit of 1.50.


Risk
The risk with the trade is if the market traded towards the call or put strikes. The worst case scenario would be if we held the position until expiry and the market was beyond the bought strike. In this case the maximum loss is defined as the difference between strikes less the premium received:

5.00 - 1.50 = 3.50

This equates to $875us. On a recommended allocation of $13,000, the worse case loss is just less than 7 percent (assuming no exercise related slippage).


Reward
Holding both calls and puts to expiry and seeing these options expire worthless could return about 2.88 percent before comm and assuming you follow the allocation amount to the dollar. This of course would change if we closed or adjusted the position ahead of expiry.


Probability
Holding the spreads to expiry has a probability of profit of about 75 percent. Holding it for just 20 days - half of the option life - has a probability of profit of 68 percent. As usual, these probability numbers use the normal distribution. Therefore the calculation ignores any trends, sentiment and overbought/oversold status. The probability calculation is certainly useful, but it's not the final word.

Disclaimer: There is a Risk of Loss in Futures Trading
DISCLAIMER HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN FUTURES TRADING CAN BE SUBSTANTIAL. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PROFITS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THERE IS A RISK OF LOSS IN FUTURES TRADING.THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER IT CANNOT BE GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND IT IS SUBJECT TO CHANGE WITHOUT NOTICE. IT SHOULD NOT BE ASSUMED THAT THE SEASONAL PRICE TENDENCIES SHOWN HEREIN OR THAT THE SUGGESTIONS REGARDING THEIR USE WILL BE PROFITABLE OR THAT THEY WILL NOT RESULT IN LOSSES. PROTRADER LLC, ITS MEMBERS OR EMPLOYEES ASSUME NO LIABILITY IN CONNECTION WITH THE USE OF THE INFORMATION CONTAINED HEREIN.