The Dow Jones (DIA) has been on a tear, surging 5.5% over the past seven trading days and 23.5% since the lows, shaking off any lingering bearish sentiment…for now. Market indicators have swiftly flipped from cautious to exuberant, reflecting a rapid shift in investor mood. However, my focus isn’t on the market’s emotional swings, bullish or bearish chatter is just background noise. Instead, I’m zeroing in on DIA’s current overbought conditions over numerous time frames, which signals a potential opportunity to fade the rally using a disciplined, high-probability approach.
With DIA trading around $445.50 as of July 1, 2025, I’m eyeing a bear call spread with a 30- to 50-day horizon, aiming to capitalize on this overbought state while maintaining a margin of safety. My goal is to structure a trade with an 80% to 85% probability of success, exiting well before the August 15, 2025, expiration to lock in profits early.
Setting Up the Bear Call Spread
To execute this strategy, I select an expiration cycle that aligns with my short-term outlook, roughly 45 days out. Within the August 15, 2025, expiration, I identify a call strike with an 80%+ probability of expiring out-of-the-money. For those without probability data on their platforms, targeting a call strike with a delta between 0.20 and 0.30 is a reliable proxy.
For this trade, the DIA 460 call strike, with an 75.51% probability of success, fits the bill. It sits just within the expected range, offering a balance of premium and safety. Our aim is to achieve a potential 28.5% return over the next 45 days while keeping the odds heavily in our favor. The short 460 call defines the trade’s risk profile and premium.
As long as DIA stays below this strike at expiration, we capture the maximum profit. However, our plan is to exit early, typically when we can secure 50% to 75% of the credit, allowing us to redeploy capital into new opportunities. Time decay accelerates as expiration nears, boosting our ability to close the trade profitably, even if DIA drifts higher. Remarkably, this setup allows us to be wrong on direction and still walk away with a profit, thanks to the spread’s structure.
Structuring the Spread
After selecting the short 460 call, we choose a long call to cap our risk, forming a spread. For this example, we opt for a 5-strike-wide spread to balance risk and reward:
Bear Call Spread: August 15, 2025, 460/465
- Sell to open: DIA August 15, 2025, 460 strike call
- Buy to open: DIA August 15, 2025, 465 strike call
- Net credit: ~$1.11 ($111 per spread)
- Total risk: ~$3.89 ($389 per spread)
- Probability of success: 75.5%
- Max potential return: 28.5%
As long as DIA remains below 460 at expiration, we secure the full 28.5% return. However, I aim to close the position early, targeting a buyback when the spread’s value drops to ~$0.50, locking in over 50% of the original credit.
Risk Management
Defining risk upfront is critical. With a maximum loss of $389 per spread, we size our position conservatively, typically 1% to 5% of our portfolio per trade, to ensure no single loss disrupts our strategy. This approach leverages the Law of Large Numbers, letting probabilities work in our favor over time.To manage downside, we set a stop-loss at 1.5 to 2 times the initial credit. For this trade, if the spread’s value hits ~$2.22, I’m exiting to limit losses. This disciplined approach, combined with early profit-taking, allows us to stay nimble and capitalize on market opportunities while keeping risk in check. By focusing on probabilities, time decay, and defined risk, this bear call spread offers a high-probability way to navigate DIA’s overbought conditions, blending caution with opportunity.
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Andy Crowder
