Back In Business

I've been hinting around at a bearish play to protect some profits. Well Mortimer, we're back in business. My tool of choice is a calendar spread.  If you're not familiar with calendar spreads, the quick version is that it's a time sensitive options spread. For a detailed explanation, please see my post here where I go into great detail about the mechanics of a calendar spread.

The rationale behind the trade is this.  I feel we're overextended by a lot.  I feel that a short term yank back to reality is in order within the next few weeks. During that yank back, volatility will spike.  As you may know, there are three components I'm betting on here.  Time, volatility and price.  I believe I have some time to wait, the short JUN call affords me that.  I believe a spike in vol, the calendar spread responds positively to vol spikes and I'm hoping for a price decline in the SPY, which is why my strikes are at 85.

So if you're following along at home, the position is a long JUN/JUL calendar @ 85.00.  I was filled at a $70 per spread debit. My profit zone is between 935 and 790 on the S&P 500 where my ideal profit range is at the strike of $85.  This will be my profit target.

Being a calendar spread, the profit grows over time.  If the S&P were to hit 850 tomorrow, my profit would be a measly $15 per spread.  If it hits that profit zone about one month from now, the profit is $115 per spread. Filled at $70, that gives me about a 1.5 to 1 risk / reward. 

I'm feeling pretty damn good about the position.  It fits my exact sentiment and if I'm wrong and the market goes to the moon, I'm not out a ton of dough.  However, the market has a way of making you feel like an idiot after you feel like you just took advantage of her.  It will be fun to see how this one plays out.

I'll keep you posted. 

Edit: Wanted to mention that SPX was at 920 when this was filled.