Anatomy of a Position Trade

I want to share you how i approach a trade setup on the SPY.

First thing to do is to perform a technical analysis and identify the red zones and potential movements.

It's clear that there is a strong support around 160, which if breached will end the bull scenario, however we also have a good positive divergence on the last swing lows which are also present in some of the index components.

We have a gap at 168 that can be used as target.

So, if i wanted to play the long side, i would Buy 100 shares at 164.39 and sell a Covered Call at 168 for 0.54 cents and collect some premium.

I would also Buy 2 163 Puts and Sell 4 160 Puts for 0.98 cents, making a ratio spread.

This means that if the stock falls to 159 (at expiration), below support i will be assigned on the 2 Puts that are naked, making me long on 200 shares @ 160. However my average on this 200 shares will fell to 157 because of the profit on the long puts.

In the end i will have a position of 300 shares with an average price of 159.46 plus the premiums received on the covered calls and the ratio.

If the stock rises to 168 at expiration, i will assign and keep the profit and premiums.

Note: Options are risky and you should read Characteristics and Risks of Standardized Options and Supplements