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The rally that began during the holiday shortened week has continued to the dismay of the bears. However, 1410 on the S&P was the area that most of my contrarian friends were anticipating and well, we're there. I expect the next few days to be quite bearish, but as we all know, no one knows owns the directional crystal ball… which is exactly why I choose to use credit spreads. Credit spreads, more specifically out-of-the-money bull call, bear put and iron condor spreads, gives me a nice margin for error.

The December expiration cycle is a bit too close to create a decent margin for error. The premium just isn't there. So, going out to January would be the ideal move. Anything between 56 and 26 days is preferred, so with January expiration in 50 days, now is the perfect time to sell a few credit spreads. With the VIX hovering around 15, volatility is low, so expect to bring in less premium than usual. Especially, if you want to keep your probability of success above 80%.

This is exactly the set-up I look for within my options trading strategies… extreme overbought or oversold readings in highly-liquid ETFs. Once an ETF in my watchlist hits an extreme, I look to sell credit spreads to take advantage of the extended short-term move.

Remember, overbought = bear call spreads. Oversold = bull put spreads.

Source: Russell 2000 Hits Short-Term Extreme... Again