How to trade a high priced vehicle cheaply

Is there a cheap way to trade a high priced vehicle like SPX, currently trading around $1380? Yes, Butterflies. Suppose I think SPX can have an up day or two after declining 77 points since October 18. Then this would be a good cheap strategy that could allow me to participate in a high priced vehicle at a reasonable price.

Strategy: DIRECTIONAL BUTTERFLY: Buy 1 November 1390 call Sell 2 November 1400 calls Buy 1 November 1410 call Total debit $1.20 ( $120 if I do the trade 1 time, which would be 1-2-1. If I put the trade on today for $1.20, on next Tuesday’s date with Implied volatility coming down 1 point ( very realistic assumption), this spread theoretically can make around 20% between 1387 ½ and 1407 ½ after commissions. On next Fridays date with same scenario, the range to make 20% would be a little wider between 1380 and 1413. Between 1384 and 1409, the yield ranges on the capital we spent, $120, would be between 30% and 43%. How about if I’m wrong? The great thing about this trade is it’s a cheap speculative play, total risk of $120 for every 1-2-1 spread we do. If it goes against us, I will write a blog follow up giving some thoughts on how I would manage this trade.


Dan Sheridan

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