Published May 19th 2023

Daily Brief- ☀️ 1x2 fun!

TLDR: As the market refuses to leave this plateau, let’s look at a 0-cost structure that profits in the recent range.

option strategy

One day we’ll call this period Le Grand Plateau of 2023.

The market has been living in the 410-420 SPY range throughout April and May - stubbornly refusing to budge in the face of either bearish or bullish catalysts. In effect stocks seem too expensive to rally, and too shorted to fall.

So what to do?

the following option structure is “for expert skiers only”

Enter the 1x2 put spread, a zero-cost structure where you buy an at-the-money put and sell two out of the money puts.

The image above shows the payout profile for [buy 1x SPX Aug 4150P] + [sell 2x SPX Aug 3890P]. You make money if prices stay in the recent range and start losing if S&P 500 falls below 3,630. If the market rallies, you just forget about it because you paid 0.

This strategy is appropriate for markets that remain in a lull - you are effectively selling volatility. So what can go wrong here?

If the market ends August more than 12.5% down from here, then you will experience a loss. So if you think we are not seeing a large drop during the summer, then this is not a bad strategy to deploy.

Once again this is a complex strategy so if you’re not an experienced option trader, stay away.

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Daily Brief- ☀️ 1x2 fun!

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