Interesting gap play with a spread.

If I were to plan on placing a spread trade with SPY perhaps, only due to looking at those options of late, this morning's action got me to thinking. I checked the FTSE yesterday and this morning so I knew there was going to be a gap down in the S&P500 index and with the wallowing of late I would also expect at least a small move up into the gap.

Seeing as a spread (a Bear Call Spread as I find these are called) has two legs, the sold call and the higher bought call there should be no reason why I cannot "leg into" the spread. Actually, I might not be able to tie the sold call tot he long call after the fact with Questrade, I need to either try it or ask.

This morning the expected gap occurs, I already have a plan to enter a spread trade anyway so I look at the numbers.

The SPYLM 117 call traded as low as 13 cents. Perhaps I would have placed a limit order for this option through my trading platform at 15 cents...so I'll use that number.

Now I am long SPY at 117 strike. Time to wait to see what the morning brings.

Seeing as SPY has returned to $110 from $108.30ish the entire option chain has appreciated. My call would be up to 16 and 17 cents. A single contract would cost me $2 or $3 more now. No big deal.

Looking at my call to sell, 114 strike, it has gone from 36/37 cents to 57/58. Selling now, or even later if I chose) would put about $20 more in my pocket. That covers the commissions at least.

Obviously the protection is not going to move as much with the underlying prices due to the distance OTM so this may not be worth the effort but waiting for the direction following the gap certainly is. This serves to drive the short call price higher faster and make the trade more profitable.

Looking at the gap mechanics for a moment I would expect that the closing price last trading day would provide resistance...how much is unclear, except that there is a corresponding gap in October of last year that is just now looking at being filled. This makes this a great area of resistance and a great place to set a spread. The expiry is 21 days for December options so the trade is also very short duration, ideal.

So why I am sitting here writing about it and not doing it is unclear to me. The market is only open until 1300h so I will take a moment and run the numbers through my spreadsheets and see what I will trade today.

Jeff.