Alright, so I’m trying something out here with this trade idea. Basically the strategy will be for a bearish outlook on a stock or in this case an ETF, I will be doing a longer term bearish put spread and then funding it with a series of short term, out of the money bear call credit spreads. The idea will be to use the credit spreads to finance the longer put spread and I’m using a spread here because it’s easier to finance. Using an outright put would mean I need to take a tighter credit spread and I’m not quiet ready for that mentally if the price moves above my short call strike on those just yet.
SPY Credit Spread: Short call strike will be for 215 (@0.33) and the long call strike will be at 216 (@0.22) both at May 16 expiry and a minimum of 5 contracts for a credit of $55.
SPY Put Spread: Short put strike will be at 205 (@4.49) and the long put strike will be at 208 (@5.57) both at a July 16 expiry and just 1 contract minimum for a debit of $103.
This gives this trade a total net debit of $48, with a maximum gain of $300 if the price falls down to 205 and a maximum risk of $595 if the price shoots up to all time highs above 216. If the trade breaks into all time highs I will need to close out the credit spread. Ideally, the price will fall down to 205 before the puts expire and I will be able to take a maximum return. However, if the price moves sideways for the next 3 months I will take a small return from selling the call spreads assuming I can get similar credits, I should be able to break even on this trade. If the price makes a new all time high above 214 then I will close out the call spread and allow the put spread to expire worthless or try to take back a small amount of it’s in the last month this will result in $103 loss plus what ever loss I take on the call spread with a maximum loss of $500.