Day 1 of The Trading Quest: Planning my first SPX credit spread

The journey starts on a Sunday

I've talked a lot about trading strategies, risk management and credit spreads already, but today is the first day where I'm actually treating this as the start of the journey.

There isn't much I can do in the market itself because it's Sunday. SPX isn't trading, the option chain isn't moving, and there is no point pretending I have an entry when the market isn't even open.

So today is going to be preparation.

I want to set up the SPX chart properly, mark the levels I care about and get an idea of what I think the market might do when trading starts again. I'm not trying to predict exactly where SPX will close next Friday. I just want enough of a view to decide whether I would rather place a bullish or bearish defined-risk trade.

I'm starting with SPX

For now, SPX is where I want to focus most of my attention. I like that I'm trading an index rather than trying to find the perfect individual company, and credit spreads give me a clearly defined maximum loss before I enter.

The basic plan is simple. If I think SPX is likely to stay above a certain level, I'll look for a bull put credit spread. If I think the market looks weak and is more likely to stay below a certain level, I'll look at a bear call credit spread instead.

I'm not going to decide which one I want before looking at the chart. I don't want to start Sunday convinced that I need a bullish trade and then spend an hour finding reasons to justify it.

The direction should come first. The option trade comes afterwards.

What I'm going to mark on the chart

The first thing I want is a fairly clean SPX chart. I don't want fifteen indicators covering half the screen. I want to see the trend, recent highs and lows, and areas where price has reacted several times.

I'll probably start by looking at the daily chart to get a broader view. Is the market generally trending upward, trending downward or moving sideways? Where was the recent high? Where did buyers step in during the last pullback? Are we close to an obvious resistance area?

Then I'll move down to shorter timeframes and mark the areas that seem relevant for the coming week.

For a bullish trade, I'm mainly interested in support. I want to know where SPX could reasonably fall before I start thinking that the bullish idea is wrong.

For a bearish trade, I'll do the opposite. I'll look for resistance and ask how far the market could rise before the bearish setup stops making sense.

I'm not looking for a line that SPX is physically incapable of crossing. That doesn't exist. I'm looking for an area that gives me a logical place to build the spread around.

Bull put spread if I'm bullish

If the chart looks strong, my first choice will probably be a bull put credit spread.

That means selling a put below the current SPX price and buying another put at a lower strike. The long put limits the maximum loss.

A simplified example might look like this:

SPX: 7000

Sell 6925 put
Buy 6920 put

Credit: $0.50
Spread width: $5

One contract represents 100 times the option price, so a $0.50 credit would mean $50 in premium.

On a $5-wide spread, the theoretical maximum loss would be:

$5.00 - $0.50 = $4.50

$4.50 * 100 = $450 maximum loss

That is roughly the type of position I'm looking for.

The exact strikes obviously depend on where SPX is trading, volatility and what the option chain looks like when the market opens.

Bear call spread if the chart looks weak

If I look at the chart and think SPX is more likely to struggle or move lower, I don't want to force the bull put setup.

Instead, I can do the opposite with calls.

A bear call spread could look something like this:

SPX: 7000

Sell 7075 call
Buy 7080 call

Credit: $0.50
Spread width: $5

Again, the maximum profit would be $50 and the theoretical maximum loss would be $450.

The difference is simply where I want SPX to stay. With the bull put spread, I want it to remain above my short put. With the bear call spread, I want it to remain below my short call.

I like having both available because it means I don't need the market to be bullish for the strategy to make sense.

The risk I'm planning is aggressive

This is probably the most important part of today's plan.

I'm currently willing to risk around $500 on a trade to collect somewhere around $40 to $60 in premium.

That's aggressive.

If the maximum loss is roughly $500, then making $40 to $60 means I'm targeting a return of roughly 8% to 12% on the amount at risk if the trade reaches its maximum profit.

That sounds attractive, but the other side of the trade matters much more. I'm risking several times what I'm trying to make.

If I collect $50 and eventually take a full $500 loss, that one loss wipes out ten $50 winners.

10 winners * $50 = $500

1 full loss = -$500

That's why a high win rate can be misleading with credit spreads. I can win a lot of trades and still have poor results if I allow the losing trades to become much larger than the winners.

This isn't a risk level I would recommend

I want to be very clear about this because I don't want these journal posts to slowly turn into recommendations.

I'm choosing to be aggressive with this account right now. That is a decision I'm making for this experiment, not a position-sizing rule I think somebody else should copy.

For most traders, risking a large percentage of an account on one options spread can make drawdowns very difficult to recover from. A few bad trades in a row can do serious damage.

I'm accepting that risk because this is the way I'm choosing to run The Trading Quest at the moment. That might change as the account changes, as I get more experience, or if the first few trades show me that the risk is too high to manage properly.

I want to document that honestly rather than pretend I'm following a conservative risk model when I'm not.

I don't want premium to decide the trade

One thing I'm going to watch carefully is the temptation to move the short strike closer to the current SPX price just because the premium looks better.

Maybe the chart tells me that a short strike 70 points away makes sense, but the spread only pays $25. Then I notice that moving the strike 30 points closer gives me the $50 credit I wanted.

That's exactly where I need to be careful.

The goal isn't to make the option chain produce $50 regardless of the setup. The strike should make sense first. The premium is what I get paid for accepting the risk at that strike.

If the trade I actually like only pays $20, I need to decide whether $20 is enough or whether I should skip the trade entirely.

I don't want to turn "I'd like $40 to $60" into "I must collect $40 to $60".

Expiration will matter too

I also need to decide how much time I want in the trade.

Very short-dated SPX spreads can lose value quickly when the market stays away from the strike, which is obviously attractive when I'm selling premium. But the position also becomes much more sensitive when SPX moves toward the short strike.

A spread with several weeks left behaves very differently from one expiring tomorrow.

For the first trades, I want to pay close attention to how the spread price moves relative to SPX rather than only looking at the final result.

If I make $50 but spend the whole trade one bad candle away from a large loss, that's useful information too.

I'm going to look at the economic calendar

The chart isn't the only thing I want to check today.

Before choosing an expiration, I want to know whether there are major scheduled events during the trade. Things like Federal Reserve decisions, inflation data, employment numbers and other large economic releases can move the index quickly.

I don't automatically want to avoid every event. Sometimes the premium might be higher because the market is expecting more volatility.

But I want to know the event exists before entering.

Finding out afterwards that an important announcement is scheduled for the next morning would be a pretty avoidable mistake.

What would make me skip Monday completely?

Starting The Trading Quest doesn't mean I have to place a trade on the first day the market opens.

If I look at SPX and don't have a clear bullish or bearish view, I can wait. If the strikes I like don't pay enough premium, I can wait. If volatility or the opening move makes the trade feel completely different from what I planned on Sunday, I can wait.

This might actually be one of the harder parts for me.

I've spent time preparing for this, so there is obviously a temptation to get the first trade opened and finally have something happening.

But "it's day one" isn't a trading setup.

My plan for today

So there won't be a P/L update today. There won't be an exciting first trade either.

I'm going to set up my SPX chart, mark the levels that look important and decide what would make me bullish or bearish next week. I'll also check the economic calendar and look through the option chain so I have an idea of which strikes might fit the amount of risk I'm willing to take.

The basic target is a defined-risk credit spread with roughly $500 of maximum risk and around $40 to $60 in premium. I already know that's aggressive, and I'm treating it that way.

When the market opens, I'll see whether the chart still agrees with the plan I made today. If it does, I'll start looking for the first real trade of The Trading Quest.

If it doesn't, day one can become day two without a trade.