SPY mid term outlook

As mentioned in one of the previous post, my view of the market is short term bullish and long term bearish. Base on Fibonacci retracement, $204.5 should be the next critical resistance level for SPY. However, FOMC meeting on Wednesday will decide the direction of SPY.

SPY has been moving up since Feb 2016. As SPY moves up, implied volatility (IV) moves down (inverse relationship). Lower IV means cheaper option premium. When the option premium is cheaper, it favors option buyer.

For aggressive trader, you may want to consider BTO (buy to open) $200 strike Sep 2016 Put Option @ 10 per option contract. Open Interest is around 12k and this indicates good liquidity.

The downside of this trade are 1) OTM Put options with no intrinsic value and 2) SPY needs to move below 190 in 6 months to be profitable.

The advantage of this trade are 1) Good liquidity due to high open interest; 2) IV is currently low and when IV moves up, option premium will increase; 3) We can close this position earlier to capture time value and we can still profit even if SPY does not drop below 190. 4) Flexible to repair if market condition invalidates our view and goes against us. (advance level)

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