Aggressive SPX Bull Call Option Strategy To Play Market Rebound

The stock market is going higher and I have positioned myself accordingly, but there is also a small probability that within the next month the S&P 500 will stage a complete V-shaped recovery and retest the highs above 2100, similar to the v-shaped rebound October 2014.

To profit from a v-shaped rebound, I opened a bull call spread on SPX (S&P 500). The maximum profit is $8600 and the maximum loss of $420, a 20-1 payoff, which is the ROI I aim for when buying spreads.

The SPX must close above 2100 at the end of the next 34 days for the trade to be profitable, and anywhere above 2015 to collect the full $8600, although I have the option to close it early. Anywhere below 2100 I lose $400.

The set-up is not perfect, which is why I only allocated $400 instead of more. A perfect set-up would be multiple days of large selling, in which case I would buy an aggressive weekly SPX call spread.

I chose SPX over NDX (Nasdaq 100) because the premiums on SPX are much lower. In the example above, the SPX has to rise approximately 7% to hit my 2100 target, and I’m risking $400. A similar bull call spread on NDX with a 7% target would cost about $800 to make $8000. It doesn’t seem worth it to pay more. NDX options, because they are more expensive, and the NDX is quite stable, tend to better for selling than buying. One idea for a trade would be to open a bull call spread on SPX like above and then finance the $400 by selling one or two cash-covered at-the-money QQQ puts with the same time until expiration.

And also, whenever possible, never ever buy ETF (SPY, QQQ) option spreads or spreads on futures like ES and NQ when index options like NDX, RUT, and SPX are available. The reason is that SPX, RUT, and NDX are much much bigger, which means fewer contracts need to be purchased and hence less commissions. The SPX has a size of 100 times the present value of the S&P 500 (1940 or so), a total of around $200,000 per contract. It’s very big. The ES has a size of 50 times the present value, a size of roughly $100,000 per contract. The SPY is very small and has a size of of just $20,000 per contract. My bull call spread example involves 12 contracts of the SPX. I would need 120 contacts to open a similar trade with SPY, and the commission costs would consequentially be 10x more. Like taking $50 and lighting it on fire.

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