The DeCarley Perspective Trading Newsletter

Using Option Spreads to Trade the ES

Futures and Options Strategy Idea


How to "Get Short" the S&P 500 with Some Room for Error

Call and Put Option Spread for Bearish S&P Play

The red lines represent the strike prices of short options within the spread, the green line represents long options.  Maximum risk occurs above the top red line, maximum gain occurs below the bottom red line.

The bears are really starting to feel the pain. Many that we talk to have been holding short futures for several days, or weeks, but have been unable to draw a stopping point. After all, the rally has been in small increments and this often encourages traders to become complacent.

The chart suggests a test of 1501ish in the ES is possible, but we all know a market taking the stairs up often takes the elevator down. If it turns, it can easily leave a lot of "would-be" bears on the sidelines. If you want to gain exposure to the downside of this market without immediate risk, you can try a bear put spread with a naked leg.

Specifically, aggressive traders can buy a March 1485 put option, sell a March 1510 call and then sell a 1430 put. This combination can be done for "even money" before commissions and fees. In other words, for little to no out of pocket expense, you can go short the ES from 1485, with a max profit at expiration occurring at 1430 or below. If the market is below 1430 at expiration, the trade is profitable by nearly $2,750 but the trade doesn't benefit from additional weakness below 1430. Assuming a "free" entry, the risk on this trade is commission paid  as long as the market stays below 1510. If the market is above 1510 at expiration (at which point it is similar to being short a futures contract) the trade faces unlimited risk.

**Conservative traders might look to wait for higher prices (1500 to 1510) before executing a similar trade.**

The premise of this trade is to gain downside exposure without the immediate risk of shorting a futures contract, nor the out of pocket expense of buying a put option outright. 

Although it is cheap, or free, in regard to price...there is risk and, therefore, margin required.  We anticipate the margin on this trade to be about $1,800.

Keep in mind this strategy is a little more aggressive than the typical short option trades we typically recommend simply because the premium collected is consumed by the purchase of a put spread.

DeCarley Trading
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Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

**There is substantial risk of loss in trading futures and options.**



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