Just sitting here watching the market move up -- and a pleasant sight it is. I was thinking that: what comes up, must come down. I don't really think our 1300 short strike will be threatened in the next few days. However, I wouldn't be surprised if the SPX gave back some points off of todays gains.
So, how can we take advantage of that and risk very little doing it? A butterfly.
For a hypothetical trade, with the SPX up about 19 points at 1358.50, let's"
Buy 10 February SPX 135 puts - XSKNE
Sell 20 February SPX 133 puts - XSKNC
Buy 10 February SPX 131 puts - XSKNA
Net debit of about $.33 ($330)
We're investing very little and we can make a nice percentage return on our investment if the market pulls back a little.
Potentially, we could make $1.67 on this play if the SPX closes in our sweet spot. However, it's unlikely that we would hold this position through expiration. Remember, if you have an opportunity to lock in a respectable, do it! When calculating your profits, don't forget to add commissions as part of your cost basis.
Think about it. It's a relatively cheap way to play a little downward move. If you don't think it's going down, then you can create something similar on the call side -- or even something at the money. Always double check the option symbols before placing your trades.
If you don't feel like trading, to hell with it. You never want to trade just for the sake of trading.
Take care and trade smart.