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Friday, June 15, 2012

July SPX Bear Call spread

SELL 6 SPX July 1415 Call (@3.30)
BUY 6 SPX July 1420 Call (@2.40)

Credit: $0.90 (0.90 * 100 * 6 = $540)
Margin: $4.10 (4.10 * 100 * 6 = $2460)

Break-even point(s): 1415.90 (Currently at 1336, SPX index would need to go up around 80 points in the next 35 days to cause a loss)
Probability of success: 80.13%
Days to expiration: 35
Max return on margin: 21.95%
Commissions: $18.00 (Assuming a very unfavorable $1.50 per contract)

Order execution:
(Click on image to enlarge)

Profit picture:
(Click on Image to enlarge)

Betting that SPX won't hit 1415 By July expiration.

Analyzing historical data for the month of June. You can see that from 1950 to date the market only went up by more than 6% once. That is once in 61 Junes. So, a 6% increase for the SPX in the month of June is extreme taking into account historical evidence. Now, the month of June opened at 1309.87 for the SPX. Assuming the market grows 6% in June (which is near extreme) then by June 30, SPX would be at 1388.46.

(Click on image to enlarge)

 And that is an extreme in statistical terms according to past data. Then from June 30 to July 20, those are 20 more days where SPX would have to keep sustaining a rally. Even if SPX hits 1415 by July expiration, I will be able to roll to higher strikes in the 1440 area and then my chances of having a winner or at least a breakeven position are highly in my favor. Stochastics at 85 are showing a bit of an overbought SPX although with only 56% of stocks above their 20SMA, this rally can last for a while, specially after Greek elections this Sunday. Still, I think it is a good opportunity with a good space for safety in my favor and don't want to miss it. If there is a market sell off after Greek elections, this position will immediately become almost a sure winner.

Related articles:
Weekend Portfolio Analysis (06-17-2012)
Weekend Portfolio Analysis (06-23-2012)
Weekend Portfolio Analysis (07-01-2012)
Weekend Portfolio Analysis (07-08-2012)
Weekend Portfolio Analysis (07-23-2012) 

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