Hello Investors,
Today we placed a “good ’til canceled” order on a new SPY trade. This trade has a very nice payoff because it is NOT highly probable. However, we think it makes sense for a few reasons. We have argued that the most likely outcome for stocks is a move higher long-term. We are quite proud of not having been super bearish during this recent push higher from the lows. We still place the probability of markets having “put in the low” as being pretty high (better than 50%).
However, if we are going back to test the lows then we may well be going substantially lower in price (again not the most probable outcome). This would be quite disappointing for a number of reasons. First, a move sharply lower probably means that something with Coronavirus has taken a turn for the worst. Second, that we are going to continue to stay invested in stocks which would likely go down sharply in value along with the markets. While we may all actively trade and do really well in that environment in other trading accounts. We use this Trading Mentors as an investment program where we look to cash flow and build assets.
So, we think it makes sense to have a big reward/smaller risk trade to capture profit and somewhat hedge/protect our accounts if things take a turn for the worst. We don’t do this type of trade often but feel that the risk/reward/probability mix justifies it for our account. We set the target of this big butterfly at a 50% market decline from the peak in the S&P 500 (170/share in SPY). The trade is as follows:
Buy to open: SPY Jan 15th, 2021 (monthly) 220.00 strike puts (ratio of 1)
Sell to open: SPY Jan 15th, 2021 (monthly) 170.00 strike puts (ratio of 2)
Buy to open: SPY Jan 15th, 2021 (monthly) 120.00 strike puts (ratio of 1)
Limit debit: 4.80
This is a GTC (Good til canceled) order and if not filled by Tuesday (next meeting) we will discuss and update prices.
Max risk = 4.80 or $480.00 per butterfly traded
Max reward = 45.20 or $4,520.00 per butterfly traded
We also sold a covered call in BAC that has filled.
Sell to open: BAC May 15th (monthly) 24.00 calls for +0.53 credit (we own 200 shares but only sold 1 contract so far)
Used the income to buy 2 more shares of BAC
Finally, we were filled in our short-term May SPY butterfly (only bought 1 contract) yesterday at our reduced 2.55 debit price.
Have a great week!