With a Santa rally to as high as 137 possible, I suggested legging into butterfly spreads to leverage the bullish scenario risklessly. An energetic subscriber has done just that, acquiring two January call butterflies: the 125-130-135 for a net credit of 1.35 (nice work!); and the 134-137-140 for a 0.31 debit. Combining the two will give him profitability over the vast price range $123-$141, with no loss possible in theory no matter what. His maximum theoretical profit would be $635 per butterfly with SPY trading at 130.00 when the January calls expire on the 20th of the month. However, the worst he could do, with SPY outside of the range 125-135, would be to make $135 per spread.
The subscriber inquired in the chat room about cashing out early if SPY does exactly what we want it to do — i.e., make a beeline for the 130 strike. I’ve furnished an answer using a McMillan option calculator (see inset). I’ll leave this tout posted for a while, since it is likely to be helpful to anyone wanting to put on the butterfly spread in the days ahead. We have not done so officially because my preference is to leg into the position at swing highs or lows. The subscriber found one of his own, however, and his diligence has paid off with a bullish position that cannot lose even if SPY collapses and which has the potential to produce a profit of as much as $635 per spread if stocks stay strong into the New Year. In the meantime, I will put out an alert if I see an opportunity to leg on the position over the next week or so. _______ UPDATE (December 8, 11:18 p.m. EST): Yesterday’s plunge has not yet produced an abcd pattern clean enough to bottom-fish, but if it does so on Friday, I’ll put out an alert to buy a January 125 call as the first leg of our butterfly spread.______ UPDATE (December 12, 3:15 a.m. EST): We’re still looking for the right opportunity, although if you can leg on the butterfly for ‘even’ intraday, you can’t lose. _______ A TRADE POSSIBILITY (December 12, 11:55 a.m. EST): SPY has just broken beneath a 123.73 midpoint support that had held for 25 minutes. (a=126.37 on 3-min, B=124.39 and C=124.67). That means this vehicle is now bound for p’s ‘D’ sibling, 122.79. If and when that number is reached or closely approached, that is where I’d suggest putting on the first leg of the ‘fly by buying Jan 134 calls. Keep in mind that for each call you buy, you will later be shorting two Jan 137 calls on the expected rally. Thereafter, we’ll make plans to nail down the last piece of the butterfly, buying a January 140 call for each January 134 call purchased, at our leisure. Keep in mind there are no guarantees that this downtrend will reverse from 122.79. Indeed, if it is easily penetrated, that would be telegraphing powerful selling remaining to be spent and perhaps the start of an avalanche. For that reason, you should stop yourself out of the January 134 calls if they trade for 15 cents less than you paid for them.