Credit Spread Analysis Following Big SPX Move

The Federal Reserve hinting at moderating inflationary pressures and a visit by George W. Bush to the NYSE constituted pleasant news for the market. Boy, it was a good day for the bulls yesterday.

If you've been following this daily blog, you know I was concerned about sell a call spread. I'm no prophet, but when everyone is worried about earnings, inflation, interest rates, etc., it leaves a lot of room for some good news to push things higher.

Earnings have been good. The economy is expanding. Easing concerns over inflation means that the Federal Reserve can leave interest rates alone, which is exactly what they did. A good dose of good news... If we had sold a call spread, we would have had to do it at about 1,440 to get a decent credit and would have the market sitting on our doorstep this morning.

So here we are with a 1,365 - 1,375 bull put spread. The SPX is now at about 1,440. I would be willing to close this spread right now for a .10 debit, allowing me to net .60, less commissions. In fact, I have placed a limit order that I'll leave open today.

That limit order will probably not fill today. The mid-price between the current bid/ask is roughly .30, and it is unlikely that the market will be so generous as to fill my order 67% below that mid-price.

This ties into yesterday's post about delta and why favorable directional movement, while a welcome development since it gives us more cushion and greater comfort, is not the heart of the profit engine driving our trade. It is time decay.

Trade well!

Christopher Smith
TheOptionClub.com