Interesting Gap Play with a Spread...continued...SPY

Well, that was easy enough.

So, I got to walk through the trade with the Questrade order desk. I goofed in that I wrote the option name down wrong and I was buying the wrong side of the spread...and selling the wrong side but all my numbers were right.

Once I got that down I was good to go.

The order is placed, I selected my net credit allowance as opposed to ordering the calls individually by price, which makes the ordering process quicker. Next time I will have the order written down exactly as it needs to be to save the confusion.

Oh, the order is filled. They tell me the commission and to expect the trade to appear in my account tomorrow, options settlement is the next morning I think.

My order:

Underlying security is the ETF SPY
Buy to open 4 Dec 118 Calls RDQLN
Sell to open 4 Dec 115 Calls RDQLK
for a net credit of 35 cents or better
Commissions are $17.95 (less than I calculated as I figured $26??)

The order filled at 1149h. Due to the slow activity today my fills show up and I can see the 4 contracts in each of the charts for the respective options. The fill prices were 24 cents for the long call and 62 cents for the short call for a net credit of 38 cents. These were the bid and ask for the options so I lost the spread right away, which my 35 cent credit allowed. Seeing as I use the spread quotes as my basis I cannot complain about that.

That gets confusing when talking about the spread in the quote while placing a spread trade order.

I could have alternately placed the order as a market order and it would have been filled the same in this case.

As long as the trade expires while SPY is under $115 I keep the full $134.50. 21 days to expiry and Christmas looming I think I will be OK...even though I am only 4.3% off the current price. Not a large margin.
The total risk is $1074
The Return On Risk is 12.5%
The daily return is $6.38

My criteria may be as follows:
Spread = $3 ( The minimum anyway)
The credit needs to be 32 cents or better yo yield 10% for the trade given the current time line and SPY price. This produces about $5.25 per day. Perhaps if I aim for a minimum of $5 per day based on a 4 contract spread I might be in good shape overall.

This will vary based on a number of factors so I think that I should just concentrate on the 10% overall ROR and the $5 per day per trade to start. Most trades should be at least two contracts (four if you count them all).

Given a $5,000 capital base I could make four such trades for a $20 per day return which works out to about $600 per month. Obviously I am not going to get rich quick on this but that is not my goal, cashflow is and this is a great start at a cashflow strategy.

I am going to look at the sector ETFs next and see where their prices are. I think that a $20 to $60 security would be a better place to be buying options as I can pick up more contracts while allowing a larger margin between the strike and real price of the ETF. Perhaps 8 contracts with the same risk profile or 16 cheaper contracts out near the 10% area.

Off to lunch now.

Jeff.