Amazing Risk Based Options Pricing Example with SPY Credit Spread

Download The "Ultimate" Options Strategy Guide

Risk based options: In tonight's video we're going to talk about all of the trades that we entered for Tuesday, June 30th. Just as a quick reminder, tonight is the last night, there's no gimmicks or sales thingies here, it's just we're closing down the lifetime membership tonight.

If you are interested in getting on, I will up later trying to answer support questions and questions that people have about joining, if they do want to join. There's no pressure to join.

Related "Risk Based Options" Resources:

risk based options

If you don't join and you are a member already. Your membership price is not going to increase. I know I've had a lot of questions on that. Hopefully, I was pretty clear on that. That would be my mistake if I weren't. If you're already part of our premium membership or our basic membership and you keep your active subscription, your premium membership and your basic membership, monthly is not going increase in price.

I will always honor the price that you have right now as long as you stay a member. I've got people that are still members at $19 and $24 a month, that have been with us for a long time that I'm still honoring those agreements. It's only new people who sign up after today that get the higher price.

Start The FREE Course on "Options Basics" Today: Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this course is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Click here to view all 20 lessons ?

Just to start off tonight, let's talk about SPY. The markets are pretty active today. Most of the equity markets were up. I think the VIX was down for a little bit today. Stocks were generally up on the day, but they were down overall. What I like about this, is that gives us opportunities to go in different directions.

Yesterday we did EFA and DIA, etc. We're starting to build some more positions, which is great. SPY just jumped up on our radar this week as having higher implied volatility, and since we need a couple more bearish positions in our portfolio to balance out what we already have, we decided to do yet another vertical credit call spread.

Now in SPY, I really like this trade because again, our premium that we're taking in here is more than the actual risk in the underlying trade. This trade, which is a $3 wide spread is selling the 211 and buying the 214. We went a little bit wider, so we didn't have to sell as many contracts and collected a very nice premium on that sale.

When we look at the chart here of SPY, you can see this is a huge jump in implied volatility. Just peaked above the 50th percentile. We want to do some contract but we also want to leave some money on the table to start scaling into some other things if implied volatility continues to go higher and higher across the board.

Now you can start to see; we're starting to get out of this long term trend-line that we've been working in for the markets. This is going to be really interesting to see maybe how far down we run before we retrace or if we just turn around from here and go higher. Needless to say, I love the volatility, and this helps out with selling some more premium.

With SPY, again, what we're trying to do here is place our strikes far enough out of the money to take in a decent premium. In the case of again SPY, we were able to take in a premium that was more than the actual risk in the underlying trade. Now that we're looking at the actual option chain here of SPY, as it continues to load up, you can see we placed the short strikes here at 2.11.

Right about the 30% probability. We did this a little bit more aggressive than we would, per say like an iron condor that we placed out on either end of the 15% probability level. Again, naturally, we're trying to be a little bit more aggressive. We need the bearish position in our portfolio so we can move in just a little bit closer.

Again, what I talk about here is that, with this probability, you can see that the probability of being in the money is at 29% so let's call it 30%, round up. What we want to do on this trade is take in credit that's 30% of the width of the strikes. The strikes are $3 wide so at most, or at least, we want to take in credit that's about $0.90. That's going to cover the risk in the trade. In our case, the credit that we took in was about $110.

We're getting more than compensated for the actual risk in the trade. That's really good. This is why we have to wait for these higher implied volatility situations because this is when we get premium pricing, and we get the edge in our favor. Does this mean this trade's going to work out all the time?

No, but this is exactly the type of trade that we have to be making on a consistent basis because pricing is real, really good. Okay. That's a good trade here in SPY. The other trade that we made is in FXI. We again went towards August and stacked another iron condor on top of FXI. This iron butterfly, we went an equal distance out on either end.

You can see on either end we went $6 out to buy protection at both the 40 strike on the put side and the 52 strike on the call side. Centered the entire trade around 46, which is basically where FXI is trading. Took in a massive credit, $320. Again, all we're trying to do here with this trade is just continue to build more and more premium.

We centered around everything 46, but again our credit moves us about $3.20 out on either end as far as a break even point. Now that we've got this big position in FXI working, this is really what we've got right now as far as all of our positions in FXI for both June and July. You can see we're still just a little bit tilted towards the bullish side. We ideally want to see FXI rebound here.

We've got a lot of premium that we're starting to build and a lot of it is already starting to decay and wither away, which is really good. As FXI continues to move, hopefully sideways or maybe even bounce, we might continue to adjust this trade or roll this trade and move the strikes closer.

Whatever we need to do here. Again, we're just continuing to be aggressive with selling premium and things that have great, high implied volatility.
As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.