I have a handful of former Options Institute students who like to keep me up on their trading. Yesterday morning I got an email from one who decided to take the other side of the big move to the upside in the S&P 500 (SPX). Just after the market open, when the SPX was at 2374, the trader sold the SPX Apr 24th 2370 Call for 6.40 and purchased the SPX Apr 24th 2380 Call for 1.45 and a net credit of 4.95. These options are Monday Weeklys and they expired on the close yesterday. The payoff diagram below shows how the trade worked out.
The S&P 500 finished the day at 2374.15, a tad higher than where it was when our trader placed this trade. I checked in with them last evening and confirmed it was held through the close. Excluding commissions this trade made $80, which is nothing exciting, but gives me a great illustration of using SPX options for day trades. It also allows me the opportunity to point out some benefits of short dated index options.
First, our trader was able to take advantage of time decay, even with hours left to expiration. The student shared that they considered buying the 2375 Call, but the result would have been no time value relative to where the S&P 500 was at the time of the trade.
Second, this trade has a natural target price (2370) and stop price (2380). Our trader put this trade on before heading to work and then had the peace of mind that they knew the worst-case scenario of the market kept rising.
Finally, since SPX is cash settled, our trader didn’t have to worry about ending up with a position in the underlying based on whether the options were in the money. The benefit of cash settlement worked out in this case since one option was in the money and the other was not.