Trade Update $SPY: Closing June Quarterly Put Butterfly for a Loss

by Dan June 25, 2015 3:28 pm • Commentary

Nearly a month ago I put on a bearish trade in the SPY for a whole host of reasons (read below), and targeted the end of this month. To refresh, from May 29th:

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

Now with just three trading days to quarterly expiration, the SPY is a little below where it was when I put on the trade but is a small loser.

I have an important decision to make as time is no longer on my side and the headlines out of Greece expected over the next couple of days make the trade binary. My breakeven on this trade is 208.50 and with the SPY near my long put strike I risk losing all of it if the SPY closes on or above above the 110 strike (that I am long) on Tuesday (June 30th is the expiration).

As we have become accustomed to, an agreement on Greece’s debt payments is likely to come down to the wire, with the June 30th deadline matching the SPY Quarterly trade expiration.  If there is a deal overnight, my trade is likely a bust, and even if we don’t have a deal in the next two days and the market goes sideways, then weekend comes and my trade decays.  If I stick with the trade and there is no deal by Tuesday I have a good shot of making money on the trade, but that is a low probability event to play as anyone familiar with the Greece Debt Crisis playbook could tell you.

At this point I am going to take the more prudent route and close the butterfly for a small loss so as to not risk a total loss.

Action: SPY ($210) Sold to Close June 30th quarterly 210/200/190 Put Fly at $1.25 for a 25 cent loss

Rationale: If there is no deal overnight I suspect the S&P500 is down 50 bps or so into the weekend, which would offset some decay and I could probably get out for what I paid, but at this point its a coin flip.


Original Post May 29th, 2015:  New Trade $SPY: A Butterfly and a Spyder

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