Omnidirectional Broken Winged Butterfly in SPX

Key Concepts

• S&P 500 (E-mini S&Ps): The primary market being traded, a major US stock market index.
• Handles: Units of price movement in futures contracts.
• Volatility: A measure of the expected price fluctuations of an asset.
• Delta: A measure of an option's price sensitivity to a $1 change in the underlying asset's price.
• Omnidirectional Trade: A trading strategy designed to profit regardless of the direction of the underlying asset's price movement.
• Put Option: A contract giving the buyer the right, but not the obligation, to sell an underlying asset at a specified price (strike price) on or before a certain date.
• Max Loss: The maximum amount of money a trader can lose on a trade.
• Buying Power Effect: The amount of capital required to open and maintain a trade.
• SPX vs. SPY: SPX refers to the S&P 500 index options, which are 10 times the size of SPY (SPDR S&P 500 ETF Trust) options.
• Credit: Receiving money when initiating a trade, typically by selling options.
• Probability of Profit (PoP): The statistical likelihood that a trade will be profitable at expiration.
• Theta Decay: The rate at which an option's value erodes over time due to the passage of time.
• Long Delta: A position that profits if the underlying asset's price increases.
• Cash Settled Product: A financial instrument that is settled in cash rather than by physical delivery of the underlying asset.
• Strike Price: The price at which an option can be exercised.
• Break-even Point: The price at which a trade neither makes nor loses money at expiration.
• Broken Wing Butterfly: A multi-leg options strategy that involves buying and selling options at different strike prices, with an unequal number of contracts at certain strikes, designed to be omnidirectional.

Market Context and Volatility

The trading session begins with a discussion of the E-mini S&P 500 futures, which are down 73 handles from their highs and approximately 10 handles off their lows, representing a significant 1% move across the market. Volatility is noted to have traded at $20, and a key correlation is highlighted: as the market goes lower, volatility goes higher. This increase in volatility means that options are currently priced higher relative to a few days ago, even at the same delta.

Trade Strategy: Omnidirectional Slightly Bullish Trade in S&P 500

The trader intends to capitalize on the elevated option prices by executing an "omnidirectional slightly bullish trade" in the S&P 500. The strategy aims to profit from both downside movement and a potential rise in the underlying asset, while collecting a credit.

Trade Construction: Broken Wing Butterfly

The core of the trade is a broken wing butterfly strategy, specifically designed to be omnidirectional.

1. Initial Leg (Buying a Put): The trader buys one 6550 put option. This is a put option with a strike price of 6550. The trader acknowledges buying a put despite being "slightly bullish," indicating a nuanced approach. The cost of this option is approximately $6,500.
2. Understanding SPX Size: It's emphasized that SPX options are 10 times the size of SPY options, meaning a single contract represents a much larger notional value. This necessitates risk definition and efficient use of buying power.
3. Defining Risk (Selling Puts): To define risk and reduce buying power effect, the trader sells two 6500 put options.
4. Addressing Max Loss and Buying Power: An initial attempt with a 1x2 ratio (buying one, selling two) at these strikes resulted in an unacceptably large max loss and buying power effect.
5. Adjusting the Wing (Buying Another Put): To further refine the trade, the trader expands the "wing" by buying one 6400 put option. This makes the spread $100 wide (from 6400 to 6500). This additional long put is trading around $500.

Trade Details and Metrics

• Net Credit Received: The trade is executed for a net credit. The trader was filled at $4.85, which translates to a credit received.
• Max Profit: The maximum profit on this trade is $5,510. This is attributed to the credit received and the structure of the spread, considering the SPX's size.
• Probability of Profit (PoP): The trade has a high PoP of 81%.
• Theta Decay: The daily theta decay is approximately $8, meaning the trade benefits from the passage of time.
• Delta: The overall delta of the position is "long by two," indicating a slight bullish bias.
• Time to Expiration: There are 35 days remaining until expiration.
• Break-even Point: The break-even point is calculated to be approximately 6445. This is the price level at which the trade will neither profit nor lose money at expiration. The trader notes that this level hasn't been seen since early September.

Trade Execution and Real-Time Data

The trader mentions that the E-mini S&Ps are currently down 81 handles, and that traders should be able to get filled around $5 to $5.55, potentially 15-20 cents better than their fill. For those interested in observing trades in real-time, a "follow page" and "bats" feature are mentioned. The trader also notes that they initiated this S&P trade when the underlying was about $9 higher, resulting in the same PoP but a slightly lower credit received ($4.85).

"Broken Wing Butterfly" - Patent Pending Strategy

The strategy is described as a "patent pending broken wing butterfly omnidirectional" strategy. The omnidirectional aspect means it makes money to the downside, but the trader's preference is for the stock to go higher, allowing them to collect the credit.

Call to Action

The video concludes with a call to action for viewers to open an account at tastyrade.com, referred to as "the number one firm in the galaxy," and to take advantage of cash incentives for opening and transferring accounts.

Synthesis/Conclusion

The video details a specific options trading strategy, the broken wing butterfly, applied to the S&P 500 index. The trader leverages current market conditions, specifically elevated volatility, to execute an omnidirectional trade for a net credit. The strategy is designed with a high probability of profit (81%) and a slight bullish bias, aiming to profit from time decay and potential price appreciation while also offering protection against downside movement. The trade's construction, including the purchase of a 6550 put, sale of two 6500 puts, and purchase of a 6400 put, defines the risk and profit potential, with a break-even point at approximately 6445. The discussion highlights the importance of understanding the notional size of SPX options and the mechanics of multi-leg option strategies.