The Trade: Yesterday I sold the SPY September 125-127 Call Spread and bought the 115-112 Put Spread for a total of $.10 Debit.
Profitable – I make money on this trade if SPY trades under $114.90 by September 16, 2011. The maximum gain, $2.90, is reached if the SPY closes below 112 at expiration.
Breakeven – If SPY closes at $114.90 on September expiration.
Unprofitable – If SPY closes above $114.90 I would lose $0.10. Above $125 the potential loss begins to increase and and at 127 or above I can lose the maximum amount, $2.10 (the $0.10 debit for the trade and the total amount of the 125-127 call credit spread).
The reason I like this trade:
I still believe that the SPY is in a range rather a bullish breakout. Therefore, I want to get short through options so I can define my risk vs reward. I sold the September 125-127 Call Spread for $.47 and took those procedes and bought the September 115-112 Put Spread for $.57. As long as the SPY stays under $125 by September expiration, I will only lose the $.10 I paid for this spread. I think the SPY will have difficulty trading much through $120 and I doubt it will get as high as $125 with a slew of economic data this week.
Andrew R. Keene