Washington Sucks, A Short Term Way to Play A 3% Sell Off in the SPX by Friday’s Close

by Dan July 26, 2011 9:28 am • Commentary

The VIX‘s 10% move higher yesterday seemed to finally represent some of the volatility in single names following earnings announcements over the last 2 weeks, despite the ~3% move higher in the SPX during that same time period.  Options traders have been pricing fear into single stock events and now appear to be focused near term on the debt debate in Washington. 

Make no mistake about it, the rhetoric is heating up and this debt ceiling thingy is gonna come down to the wire. The President’s speech last night and Speaker Boehner’s response get us no closer to a resolution and only raises the stakes.  A short term deal to raise the debt ceiling will most likely get done at the 11th hour because the debt ceiling doesn’t have to be negotiated along with the long term budget. The House may be crazy, but they’re not that crazy. They can raise the debt ceiling at anytime.

One way to play a crescendo of pessimism into the weekend and the looming Aug 2nd deadline could be to buy tight weekly SPY Put Spreads (Friday expiry).

TRADE: BUY SPY ($133.83) July29 131/130 Put Spread for .12.

-Buy July29 131 Put for.37

-Sell July29 130 Put at .25

Break-Even on July 29th (Friday) Expiration:

Lose .12 with stock above 131, lose up to .12 btw 131 and 130 .88

Profit btwn 130.88 (down 2.2%) to 130 (down 2.9%)….max gain with stock 130 or lower on Friday’s close.

TRADE RATIONALE: even with VIX spiking yesterday, market appears complacent and this will likely change as we get closer to the weekend.