It's a rather simple trade. I sold the 1800 puts on SPX with 14 days to expiration. I got them for a 3.60 credit with a Delta of 9 and Theta of 50. This means that I picked up $360 per contract with a probability of the option remaining out of the money around 91%, and the Theta tells me I can expect to see the rate of decay at about $50 a day (this will increase a little every day until expiration).
Now I only added the puts because I can go further out on the put side than the call side, and I see that we have already touched the 21 week moving average for the SPX. The SPX's response to the past times it has touched this level has been to come back, and offer some resistance at this level. This doesn't mean that it can't go through, and blow my theory to smithereens, but I do trust the probability that it won't 91% of the time. Here's the chart that I was looking at:
The yellow line represents the 21 week moving average. As you can see from past dips down, the line has held. Now if we do see the SPX continue to break down, and we have a few consecutive weeks below the line. Then I would consider that a trend reversal is taking place.
In addition, I'll be sure to update you and let you know what I do with the trade if I happen to have to make an adjustment or take it off. Generally I'll take my profits at 50%. So my goal is for theta to crush the value of the option until I see it worth around 1.80.
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