Rally Getting Long in the Tooth: Low Premium, Levered Way to Play- SDS Sept Call Fly

by Dan August 31, 2011 1:27 pm • Commentary

Ok Well I am sure I will be a little early here, we have gone a pretty healthy distance off of the lows in a short period of time….. I want to start putting on a short structure that offers a small premium outlay but could have a very big pay out if we have just a 5% sell off in the SPX by Sept Exp.

I want to use options on the SDS, the Proshares Ultrashort S&P500 etf....this is the DOUBLE SHORT OF THE SPX.

TRADE: SDS ($22.30)  Buy Sept 24/26/28 Call Fly for .15

-Buy 1 SDS Sept 24 Call for .63

-Sell 2 SDS Sept 26 Calls for a total of .72 (.36 each)

-Buy 1 SDS Sept 28 Call for .24

Break-Even On Sept Expiration:

Profits: Btwn 24.15 and 26 make up to 1.85, at 26 make full 1.85, btwn 26 and 27.85 profits trail off…..

Loses: below 24 and above 28 lose full .15 premium and btwn 24 and 24.15 lose up to .15 and btwn 27.85 and 28 lose up to .15

TRADE RATIONALE:  this is the punt of all punts…I am looking to isolate a range where the index just was, but use leverage upon leverage to do so….this sort of trade is not for everyone and in a  lot of ways you really need to thread the needle for it to work…..but if it does it offers low risk and high reward. RISK WHAT YOU ARE WILLING TO LOSE.