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SPX Bearish Butterfly – 1600 Target

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With markets looking like they might continue to be weak over the next few weeks, the following is a trade that I think makes a lot of sense. Many market participants are calling for SPX to test 1600 and that looks like a very logical level of support.

A bearish butterfly in SPX is a very cheap way to gain directional exposure over the market for the next few weeks.  Here’s the current SPX chart.

SPX Butterfly Trade

Here’s how you could set up the trade:

Date: August 27th 2013,

Current Price: $1639

Trade Details: SPX Bearish Butterfly

Buy 1 SPX Sept 19th $1575 put @ $8.45
Sell 2 SPX Sept 19th $1600 puts @ $13.10
Buy 1 SPX Sept 19th $1625 put @ $19.95

Premium: $220 Net Debit

The spread is fairly wide, so you may have to go as high as $235 in order to get filled.

Looking at the September expiry, a 1 standard deviation move in SPX would put the index around 1575, so that is at the lower end of the bearish butterfly profit tent. The ideal scenario for this trade would be for SPX to drift down to 1600 over the next 2 weeks at which point you could exit prior to expiry for a decent profit.

SPX bearish butterfly payoff diagram

Most people think of butterflies as a neutral strategy that is placed at-the-money, but directional butterflies are a great way to gain cheap directional exposure. Much cheaper than an outright put purchase.

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