Short term
Trade view / 20 September 2016 at 15:03 GMT

Market neutral strategy on S&P 500 (SPY)

Product Manager Futures and Options / Saxo Bank
Denmark
Background

We are initiating this market neutral strategy on the US equity benchmark with the expectation that the index will remain range-bound till US elections. We will take a slightly bullish view with this strategy as we believe the Fed is not likely to raise interest rates tomorrow.

SPY Daily
 Source: SaxoTraderGO

As a tool we are using a long calendar spread which will benefit from two angles: time decay (theta) and change in volatility (vega). 

This slightly out-of-the-money 217 call calendar uses the S&P 500 ETF (SPY) and consists of a long 26 OCT 217 Call and short 30 SEP 217 Call. We expect the market to recover some of the losses from last week but to not trade significantly higher. The purchase of the calendar will result with a net debit of $1.30. 

We will be able to roll out the short calls nearly 5 times using the weeklys to make any adjustments, if needed. If volatility is still relatively low and therefore options are relatively cheap. In the scenario of volatility expansion the calendar will be positively impacted.

Management and risk description

Our total risk is defined within the initial net debit of $1.30. We will have the opportunities to roll out of short calls a few times which should reduce our initial investment and improve our probabilities of success. Each weekly option can bring roughly $0.60.

Parameters

Underlying price: $214.22

Buy +1 26 OCT SPY 217 Call at $2.10
Sell - 1 30 SEP SPY 217 Call at $0.80

Net Debit:  $1.30

Maximum Risk: $1.30

Maximum Gain: depends on the number of rolls and the underlying price closing near our long strike of 217 at expiration. This is a low probability, potentially high return trade.

Entry: today

Stop: no stop

Target: near or at $217 at expiration 

Time horizon: 5 weeks

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
20 September
Market Predator Market Predator
@Georgio: maybe better to open trade after super wednesday, or not? You mentioned low prob. hike BUT some still exists, how is trader protected? Sorry for my Q but I can't see loss limitation in catastrophic event :( Thx!
20 September
Georgio Stoev Georgio Stoev
Sure, anything could happen.
In the event that market dips, the trade still stands till about 212. We have 35 days in it and the time is on our side. Limited loss- premium paid of $1.30
20 September
Market Predator Market Predator
OK, thanks for your quick reply! I play opposite You: BOJ or FED action this week :) I'm very OTM, but in case of action I believe it might be drastic move! Moreover it cost me only 25pips. R:R negative, but cost acceptable.
20 September
Feders Feders
Hi Georgio, in the saxotrader I'm receiving an error when trying to buy the 217 call, saying Price exceeds aggressive tolerance. Did you receive that error too?
20 September
Cat Cat
Hello - I am receiving the same error message when trying to execute the long call.....
20 September
Georgio Stoev Georgio Stoev
Sorry about this. Can you take a screenshot and post it please. Thx
20 September
Georgio Stoev Georgio Stoev
You are right. Just received the error myself. Apologies guys. Let me escalate.
20 September
Feders Feders
Support desk took the order offline
It's been executing at the momento, they say to me
20 September
Feders Feders
They say is because no one trade that call, so there is no reference price,
20 September
Georgio Stoev Georgio Stoev
Glad they took your order through the chat
20 September
Feders Feders
yes, great support that chat!
20 September
Georgio Stoev Georgio Stoev
did you tell them it was a calendar spread, so they filled both sides?
20 September
Feders Feders
I said that is a calendar spread, but I rather prefer to see first the long call filled, and then go for the short call. Because with the short call I'm not seeing errors likes the one with the long call
20 September
Feders Feders
Until now the order is still been executing
20 September
Feders Feders
They said that I'm going to see it in Positions when it's done
20 September
Feders Feders
The order for the long call was executed just a few minutes ago, and I made also the short call
21 September
Georgio Stoev Georgio Stoev
good to hear it - we are working on resolving the issue.
21 September
AlexF AlexF
Hello georgio would you have some advice on a call option on usdjpy that is not too expensive as edge to a long equity portoflio in case we get a rate hike (I also have a put on (SPY)
22 September
Georgio Stoev Georgio Stoev
Hi Alex, sure how far out you need protection for your long equity portfolio. If you still need it.

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