New Trade $SPY: A Butterfly and a Spyder

by Dan May 29, 2015 11:13 am • Commentary

I’m going to keep this simple. Long premium directional plays in large cap U.S. index etf have been a tough way to make money in this range-bound market. Timing has been crucial for owning options premium, while the less conventional short premium strategies have been consistent winners.  But, U.S. stocks won’t break out, and the volatility in Chinese stocks this week should cause some antennas to pick up a bit just as the volatility we have seen in currencies, commodities and bonds at some point will cause even the most devout equity investors to rethink the value proposition of committing new capital to stocks.  I am not suggesting that the S&P 500 (SPX) has topped out, but its inability to breakout, with what I believe is waning momentum and a lack of leadership at a critical time for the U.S. Fed (FOMC meeting on June 17) could cause test of crucial technical support at 2000 in the SPX.

Cognizant of the whole long premium bleed in a dull market, I want to construct a defined risk way to play for a re-test of 2000 in the SPX into quarter end.

This is not a panic trade, but its has very attractive risk reward for those considering portfolio protection, or to express a dollar cheap bearish view.  If you were very concerned about an imminent pullback there are better ways to express defined risk bearish views that could have more leverage.

TRADE: SPY ($211.20) Buy June 30th quarterly 210/200/190 Put Fly for 1.50

-Buy to Open 1 June 30th 210 Put for 2.95

-Sell to Open 2 June 30th 200 Puts at .85 each or 1.70 total

-Buy to Open 1 June 30th 190 Put for .25

Break-Even on June 30th Quarterly Expiration:

Profits: between 208.50 and 191.50 make up to 8.50 with max gain of 8.50 at 200

Losses: of up to 1.50 between 208.50 and 210 & between 190 and 191.50 with max loss of 1.50 below 190 or above 210

Rationale: With most of the S&P earnings out of the way, and the Fed the next real catalyst, with possible volatility emanating from Europe as Greece default is once again a concern, near term equity protection could make sense. But this trade risks less than 1% of the SPY, breaks-even down 1.3% and offers a very wide rang of profitability to the downside, with max profit down 5% in a month, with profitability to down 9.5%.

The level is 2000 in the SPX and obviously 200 in the SPY:

SPY 1yr chart from Bloomberg
SPY 1yr chart from Bloomberg