The market (SPY) has been trading in a very narrow range since the start of December. We have tested both the top-end ~ 697 as well as the bottom-end of the range ~ 675 several times, yet we now find ourselves right in the middle again. Given the poor action in the hyperscalers, software names and the financials, my guess is we resolve this narrow range to the downside at some point. While you can buy SPY puts or put spreads waiting for that potential break of support, it certainly isn’t out of the question that we continue to “chop” back and forth for several more weeks or months, or that we eventually do breakout to new highs. In addition, buying 1-month (March) puts has become a lot more expensive with 40-delta put implied volatility having climbed from a low in December of ~ 11.8 to a current 17 (even though market has continued to trade sideways and 30-day realized vol is only ~ 12.4).
When looking at the SPY chart, a few things stand out on a technical basis. First, there appears to be the first line of support at the 675 level as that has “held” numerous times since December. Second, should we break that support area I believe the next real support area for the market would be at the 650 level as that was the market low back in Oct and November, and it also is the rising 200-day moving average. Given how technical the market has become, I believe targeting that 650 area as part of a “cheaper” downside hedge structure should be incorporated in any short-term option structure. Therefore, we that in mind and implied volatility much more expensive than it was a few months ago, I believe SPY put butterflies that specifically target that 650 level look extremely attractive here.
Trade:
Buy SPY March 20th 675 puts 1x
Sell SPY March 20th 650 puts 2x
Buy SPY March 20th 625 puts 1x
Costs ~ $2.50 (SPY 684 pre-mkt price ref)
Trade Details:
- Buying the March SPY put butterfly with market continuing to trade in a very narrow range for the better part of three months
- Trade targets a break below recent support at the 675 level, with a max profit down at the next major support are of 650
- Trade offers a 9x to 1 max payout at expiration on the limited-risk bet/hedge
- Max profit on the trade is 5% lower at the 650 level. Keep in mind that the 2 largest 1-month calendar declines in SPY over the past 2 years have been 5.86% in March 2025 and 4.03% in April 2024
- Trade has a small short delta to start, and most importantly is gamma AND theta positive to start as well
- Please reach out to me or the 22V sales team for updated pricing and execution capabilities
SPY continues to trade in a narrow range. The GREEN area highlights where the March SPY put butterfly trade is profitable at expiration (with max profit at the 650 area)
1-month (March) SPY 40-delta put implied volatility has climbed from < 12 to a current 17 since December (even though 30-day realized is the SAME at ~ 12)
