Bear Call Spread Opend on the SPX

Monday, I told you I'd go hunting for bearish credit spreads. The market cooperated yesterday, pushing higher than I anticipated.

Is the correction over?

Certainly, stocks did tally some healthy gains. Volume was light, however.

Watch volume for tell tale signs of institutional money.

Today, the market tried to add to those gains but before market close all of the major indices were in the red.

Tuesday was a good day in other respects, however. That big push upwards made it possible to sell bear calls spreads at more distant strikes and still pull in a handsome credit.

I sold the April '07 1,460 - 1,470 bear call spread for a $1.20 credit. My maximum risk is:

$10 - $1.20 = $8.80 - or -
$880.00 per spread

The maximum return on risk is:

$1.20 / ($10 - $1.20) = 13.6%

The objective now is to open a bull put spread, which will further reduce the maximum risk and enhance the return. In the current market conditions, further downside is not only possible but, personally, I expect it.

Any bull put spread will need to be at a distant strike and bring in a healthy credit. I placed orders for one today, but with the market spending most of the day in the green and the VIX subsiding the order remained unfilled.

Tomorrow's another day and I would not be surprised to see us open down after a disappointing close today.

Christopher Smith
TheOptionClub.com