Income and Event Trade in SPY

[Steven Place]

Before we get started, let me just say that you can take this trade on SPX but I am using SPY because it has better liquidity and you can scale in with smaller size.

This is a bit of a complex trade. The trade thesis is a combination of a few advanced considerations:

1. The only big market moving event going into the end of the year is the Fed and whether or not they will raise interest rates at the december meeting.
2. Because of this risk, the implied volatility in December and January options is unusually high.
3. I expect that after the first move post-Fed, that will be it in terms of volatility going into the end of the year.

Here’s the trade:

Buy to Open SPY Jan/Feb Put Calendar @1.70

Here’s why I’m putting on this trade:

1. The trade makes money from time decay, so if SPY continues to drift or have volatility compress, the trade will make money.
2. After the Fed meeting, the premium in the Jan options will collapse as the near term risk is gone *and* the market will start to price in lower volatility with holiday trading
3. I’m assuming that the Feb premium will stay pretty elevated. It may come off a bit but the thesis is that Jan options theta and vega will compensate for it easily.
4. The term structure is flipped a little bit and we can take advantage of that. Jan IV is at 16.25% and Feb is at 15.89%– this relationship is normally flipped.

This is a SCALING Trade so if the market sees a close above 210 or below 202 we will add to the trade.
Target profit is 20% return on max risk.

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[Steven Place]

202 was broken on friday so it’s time to add another round of calendars:

Buy to Open SPY Jan/Feb 203 Put Calendar @1.75 or lower

If SPY loses 198 we will remove deltas by purchasing Feb SPY puts.

[Steven Place]

Fed voodoo is coming out, and the front month vol is getting smashed.

Time to bail.

Sell to close SPY Jan/Feb 207 Put Calendar @2.05 or higher

Sell to close SPY Jan/Feb 203 Put Calendar @2.10 or higher

Just float the orders out right now, they may not get filled now but you could get lucky on market makers rolling out positions.

[Steven Place]

It took a little while, but those fills are now available.

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