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The 1300 But No More Trade on SPX

We've got this tweet from Vinaya today:

I'm inclined to believe him. Big, nice, round numbers tend to act as magnets in individual markets and indices, and it just seems that 1300 could be a natural target for this current uptrend. We can talk about all the sentiment, divergences, and correlations we want, but here's the deal-- the trend's up and there is an absurd bid to this market. I'd love a pullback but so does everyone else, and that psychological reason is causing a nice grind higher.

So let's say you think 1300 is coming, but upside is significantly limited after that.

Well there's a trade for that. You could do a broken wing butterfly. This is a trade where you sell 2 contracts and buy the "wings", but the wings aren't equidistant from the middle.

You can modify the strikes to your liking, but let's look at this trade:

Buy 1 SPX Feb 1285 Call

Sell -2 SPX Feb 1300 Call

Buy 1 SPX Feb 1335 Call

Credit: -2.60

So what does this trade do? Well let's look at the risk profile:

There's 3 parts to this trade:

  1. SPX Stays under 1285. Well thenn the "inevitable" pullback occurred and you keep the credit. Congrats for nailing the top.
  2. SPX is above 1285 and below 1317. If we do get the run, you'll get a nice kicker on a 1300 pin. The max profit is around +1700 so the average is about $850.
  3. SPX is above 1317. If this happens, it means the SPX has moved beyond 1 standard deviation, which happens about 1/3 times. You then get some nasty gamma effects, and your risk is maxed out at -1750 on a break above 1335.

So if you think we will get this slow continual grind up and you've got the margin to put this on, it's a pretty nice way to structure your risk. There are hedging techniques if it starts to rip too hard to the upside, and you could potentially leg into this fly by starting off with the bull call spread and rolling to a fly. If that makes sense.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/