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Fading or outright shorting the rally using defined risk spreads - DIA
2 min read

Fading or outright shorting the rally using defined risk spreads - DIA

Fading or outright shorting the rally using defined risk spreads - DIA


On Monday we took a look at some of the broader market ETFs, specifically for those looking to fade a stalling rally either outright, or as a portfolio hedge. You can read the post here and the details from a bearish target in SPY when it was trading ~$294

With the market indeed losing a bit of steam the past few days it's a good time to dive a little deeper into where the weakness lies and see if there are any other similar defined risk short opportunities, either outright or as hedges.

The Set-Up

Banks, Small caps, Airlines, and even the Dow 30 have been showing signs of weakness. For those looking to press or protect here's the updated setup in those from OptionsAI technology:

Ways to Play

We've focused on IWM and SPY recently so let's pick on the Dow 30 - DIA for this example.

Here's a bearish target in the DIA of about $215 in July:

I focus on two spreads here, the 235/215 debit put spread, and the 235/255 credit call spread. Both are bearish, both are 20 wide and which one depends on what you're looking for. The short call spread offers good probability of profit because its breakeven is above where the stock is currently trading. It's essentially saying, "sure I'm bearish, but what I really am is "not bullish" and leaves room to make money even if the market doesn't drop precipitously. In fact, it even has a buffer where it would still make money with the market slightly higher.

The debit put spread is less of a probability of profit because its breakeven is lower, it needs the market to drop. It offers a higher payout for lower cost. It's the "more bearish" option. Both are good options to fade the market and which to use is dependent on the why, is it a hedge, is it outright, and how bearish am I, or am I simply not bullish?

See a part of OptionsAI technology with your own price target and demo trades in AAPL HERE

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