Today we are applying a Bear Call spread on ASX 200 index (XJO) which has been consolidating at the top of its range.
Analysis:
The XJO has come off its 11 year highs, bouncing of resistance at roughly 5400. This follows a pullback in both Asia and the U.S as “Trade war” tensions rise. The gap between the two largest economies in the world seems to be widening with further Tariffs and rhetoric coming from both nations.
Considering the run we have had since late December ’18, having a bit of a pullback or at least some consolidation makes sense.
We can look to trade a Bear Call where we place our risk above 6400 and look towards the end of the month as an expiry. If we see the market trade below 6400 by the end of the month then we make maximum profit. If the market does continue to sell off, then we can always look at taking a good profit early, but otherwise we can just sit on our hands and let time do the work. Basically, we can profit from the market going sidewards and falling – a great strategy to have during times of uncertainty.
The strategy:
There are many different types of options strategy’s used in different market conditions. The key reasons traders use this style of strategy is that:
- Benefits from time decay (as time progresses, our trade increases in value).
- A very popular strategy used in a falling to sideways market.
- Allows for some upward movement.
- Can be used by busy people as the risk can be managed from a far.
- Has the possibility to close out for zero brokerage.