Data source: Barchart.com

On 28 April, through a few executions and with the underlying index at 8,031.26, a trader purchased 650 S&P/ASX 200 1 May 8,000 Calls at 67.77 and sold the same number of 1 May 8,050 Calls for 39.77. The result is a payoff at expiration which was just three trading days later. 

Data sources: Bloomberg and Author calculations

Break-even for this trade is 8,028.00, slightly below where the market was when the trade was executed. Performance for the S&P/ASX 200 is included in the diagram to demonstrate how using this vertical spread compares to being long the index. For example, if a trader owns the index and wants to limit losses, they may do so by entering a stop loss order which would send a sell order into the marketplace if the index were to hit 8,000. Conversely, if their target price is 8.050, they may put an order in to sell if the index if it reaches that level.

The structure of this trade limits losses if the index is below 8,000 and limits gains over 8,050. A major difference between using the vertical spread is that the potential profit and loss are certain if the trade is held to expiration. On the loss side, using a stop loss order could result in an execution below the stop price resulting in more of a maximum loss than planned for.

On 1 May, with the S&P/ASX 200 at 8,120.70, a neutral to bullish trade hit the tape as a trader purchased 500 of the 15 May 8,000 Calls for 147.00 and sold 500 15 May 8,150 Calls for 54.50, resulting in a net cost of 92.50 per bull call spread. Note, unlike the first trade in this blog, this trade realizes the full profit of 57.50 if the index is unchanged at expiration.

Data sources: Bloomberg and Author calculations

The index moved up by over 170.00 points between execution and expiration. It also appears this trade was held through settlement on 15 May, which at 8,297.48 is well above the short 8,150 strike resulting in the maximum profit of 57.50.

The S&P/ASX 200 was under some pressure on 5 May, closing at 8,157.78, down almost 1%. One trader took advantage of this through executing a put butterfly using options expiring on 8 May. This trade purchased the 8 May 8100 Call for 85.00, sold 2 8 May 8200 Calls for 25.00 each and then finally purchased the 8 May 8300 Call for 5.00 resulting in a net cost of 40.00 per spread. 

Data sources: Bloomberg and Author calculations

This trade is slightly bullish as the break-even level on the downside (8,140.00) is much closer to where the market was at execution compared to the upside (8,260.00). Too strong a move to the upside could result in this trade losing value, therefore slightly bullish is an accurate description.

The trade uses options expiring in three days, and each day between execution and expiration the S&P/ASX 200 closed between 8,140.00 and 8,260.00. Final settlement on this trade was 8,191.65 resulting in a profit of 51.65 per spread.

Not all bullish spread trades of interest, using non-standard expirations, focused on just a few days. On 2 May, a trader sold 355 22 May 7,950 Puts for 25.00, buying 355 22 May 7,850 Puts at 17.00. The net result is a credit of 8.00 and risk of 92.00 as shown below. The 22 May expiration is a non-standard expiration but had three weeks until expiry when this trade was executed. 

Data Sources: Bloomberg & Author Calculations

This trade achieves the maximum profit of 8.00 if the S&P/ASX 200 is above 7,950 on 22 May expiration. This represents a drop of 3.50% at execution time. The worst-case scenario places the index at 7,850 (down 4.70%) or more, resulting in a loss of 92.00 points. The dollar risk reward may not fit every trader’s risk profile, but a lot needs to go wrong in a short period of time for this trade to realize the maximum loss.