Buying during weakness with potential upside

Data source: Barchart.com

A first buy on weakness trade from 7 April purchased the Apr 7,200 Put for 127.00 and sold the Apr 7,300 Put for 155.00 taking in a credit of 28.00. This trade was executed with the underlying index at 7,365 and before the drop below 7,200 during the trading day. The trade timing was a bit early, but the structure allows a trader to be early but stick with the trade.

Bull put spread structure

Data sources: Bloomberg and Author calculations

Based on trading activity, it appears this trade was held to expiration (17 April). With April settlement coming in at 7,763.30 the trader behind this bull put spread realised the maximum profit of 28.00. As noted, this trade was carried out before the S&P/ASX 200 traded below 7,200, a level that would result in the maximum loss of 72.00 points at expiration. However, unlike buying an ETF or future to catch the dip, the worst-case scenario is known with this trade structure. Knowing the worst-case scenario likely makes it easier for a trader to stick with a position when the trade is not working as hoped.

Neutral structure with an iron condor

The second example, taking advantage of the quick move down on 7 April, is a bullish trade using neutral structure. With the S&P/ASX 200 at 7,338.20 a trade executed an iron condor with a long time to expiration (September) and a widespread between short strikes (6900 to 8500). On the downside the trader sold the Sep 6,900 Put for 271.00 and bought the 6,800 Put for 253.00. The upside portion of the spread sold the Sep 8,500 Call for 67.00 and bought the Sep 8,600 Call for 61.00. The net result is a credit of 24.00 and a payoff at September expiration is shown below. 

Data sources: Bloomberg and Author calculations

Recall, this trade has the potential for a wide range of profitability. Based on where the index was when the trade was executed, if the S&P/ASX 200 is between down 5.97% and up 15.83% a maximum profit of 24.00 per spread is realised. The maximum loss of 76.00 points occurs if the index moves down by 7.35% or higher by 17.19%. An iron condor is normally considerd a neutral trade, but this version is a bit more bullish with about 10% more room on the upside than the downside before a short option strike is reached.

With this iron condor, we did state at the beginning of the discussion that we had an issue with it. Selling the 8500 Call and buying the 8600 Call only resulted in a credit of 6.00. After the index rebounded a bit this leg could be sold for 14.00 points. It may have been possible to leg into this trade, waiting for higher index levels to execute the call side.

Finally, a trade that was well executed, catching almost the low of the day. With the S&P/ASX 200 at 7,191 (less than 30 points from the April 7 low) a trader executed a very aggressive bullish spread. Specifically, they sold the Jun 7,900 Put for 742.10 and purchased the Jun 7,400 Puts for 431.70 resulting in a credit of 310.40. The payoff at expiration appears below. 

Data sources: Bloomberg and Author calculations

In late April, based on the S&P/ASX 200 at 7,816, the long 7,400 put could be sold for a premium of 70.00 and the short 7,900 put covered for a cost of 215.00. These transactions result in a net debit of 145.00. Based on the 310.40 credit when the trade was executed, the unrealised profit is just over 165.00 points.