There is no doubt the S&P 500 (SPY) has been volatile over the past month or so.
In fact, we’ve seen historic drops and advances. .
Vanguard founder Jack Bogle recently said:
“I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50% declines, I’ve seen a 25% decline in one day and I’ve never seen anything like this before.”
This type of volatility often occurs during bearish cycles; however, it is rare during bull markets.
It really doesn’t matter to me . . . I’m just enthused by the continued heightened levels of volatility as seen through the VIX.
And admittedly, I’m leaning a little more bearish these days . . . and the return in volatility has helped me to reap some really nice gains. In fact, while the market has been moving sideways to lower I have managed to make 11/12 winning trades for an average return of 17.2% per trade. Cumulative gains . . . 204.3%.
A bear call spread – or vertical call spread – is my trading strategy of choice in this market environment. It’s probably the most used trading strategy in my arsenal of options selling tools for a variety of reasons. Here are a few:
- I believe the market doesn’t crash higher; it crashes lower.
- The strategy allows me to have a margin of error just in case my directional assumptions are wrong.
- I can define my own risk/reward at order entry.
- Basically, I can choose my own probability of success on each and every trade I place.
A vertical call is a credit spread composed of a short call at a lower strike price and a long call at a higher strike price, thereby creating a credit or cash inflow. The nature of call pricing tells us that the higher-strike purchased call will cost less than the money collected from the lower-strike sold call.
The ideal outcome is for the underlying stock price to stay below the strike price of the sold call through option expiration.
Bear call spreads are not new to the world of investing. Unfortunately, not enough investors are aware of this sound options strategy which provides reasonable expectations for returns.
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Source: Wyatt Investment Research