Trade view /
20 September 2016 at 15:03 GMT
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.
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.
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.
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