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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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What are my options - SPX
Koen Hoorelbeke
Investment and Options Strategist
Summary: The upcoming CPI-numbers can impact the overall market, so you might consider a trade-setup on an underlying with a broad reach, like the S&P 500 Index. This article discusses possible trade setups using options on the S&P 500 Index.
What are my options - SPX
The Consumer Price Index (CPI) is a critical economic indicator that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The upcoming CPI announcement on Wednesday can lead to significant market movements, affecting the prices of stocks, bonds, commodities, and their derivatives.
As the CPI-numbers can impact the overall market, you might consider a trade on an underlying with a broad reach, like the S&P 500 Index. The S&P 500 Index is identified by the SPX-ticker.
Options on the SPX are an alternative to options on the SPY. Unlike the SPX, the SPY is an ETF, and approx. 10 times smaller than the SPX. There are however more differences why some traders and investors prefer the SPX:
- Cash Settlement: SPX options are cash-settled, meaning you won't end up with a large position in the underlying securities when the options expire. This can be beneficial if you want to avoid the potential complications of physical settlement. In some countries you avoid extra taxes in case of assignment.
- Size: Each SPX option contract represents 100 times the index level. For example, if SPX is at 4,000, each contract represents $400,000 in value. This makes SPX options more efficient for larger accounts.
- European-style Exercise: SPX options can only be exercised at expiration, which eliminates the risk of early assignment that you might face when trading American-style options like SPY.
Below are some strategies you can use to act upon the upcoming news-events.
Please note that the strategies and examples provided in this article are intended for educational purposes only. They are designed to aid in the development of a thought process and should not be blindly copied or implemented. Every investor or trader must conduct their own due diligence and consider their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market involves risk, and it's crucial to make informed decisions.
Strategy: Vertical Credit Put Spread (Bullish)
The Vertical Put Spread is a defined risk strategy, meaning that your risk (and profit) is defined upfront. This is achieved by selling a put option at a certain strike price, and simultaneously buying another put option at a lower strike price as insurance. The goal is to profit from a rise in the stock's price, or a price-decline that doesn't go under the short put of the vertical spread.
This setup involves a Bull Put Vertical Spread strategy on the S&P 500 Index. The index last traded at 4398.95 USD.
The option strategy consists of two parts:
- Selling to Open a Put option for expiry date 18-Aug-23 at a strike price of 4250 USD
- Buying to Open a Put option for expiry date 18-Aug-23 at a strike price of 4240 USD
This is a credit spread as the premium received from the short put is greater than the premium paid for the long put, resulting in a net premium received of 120 USD. The margin impact for this trade is 804.83 EUR with no trade fees listed. The maximum risk for this trade is -880 USD, with a maximum profit of 120 USD.
The breakeven point for this trade is 4248.8 USD. The trade has a probability of profit at expiration of 79.31% based on the delta's of the short-position.
A Bull Put Spread is a bullish strategy that profits from a rise in the underlying asset's price or a fall in the implied volatility. It provides a defined risk trade with the maximum loss being the difference between the strikes minus the net credit received.
As with any strategy, there are always risks involved:
Price Risk: If the S&P 500 index falls below the breakeven point of 4248.8 at expiration, the trade will result in a loss.
Gap Risk: The index could gap downwards to a level significantly below the strike price of the long put, leading to losses sooner than expected. The maximum loss for this trade is 880 USD.
Early Assignment Risk: There is no risk of early assignment with SPX options as they can only be exercised at expiration and always cash-settled (meaning no delivery of underlyings).
Strategy: Iron Condor (Neutral)
The Iron Condor is a defined risk strategy that seeks to profit from a lack of movement in the underlying asset's price. This is achieved by simultaneously setting up a Bull Put Spread (selling a put and buying a lower strike put) and a Bear Call Spread (selling a call and buying a higher strike call). The goal is to have the underlying asset's price stay within the range of the two spreads by expiration. Profits are limited to the net premium received for setting up the trade, and the maximum risk is the difference between the strikes of either spread, minus the net premium received.
The option strategy consists of four parts:
- Buying to Open a Put option for expiry date 18-Aug-23 at a strike price of 4560 USD.
- Selling to Open a Put option for expiry date 18-Aug-23 at a strike price of 4555 USD.
- Selling to Open a Put option for expiry date 18-Aug-23 at a strike price of 4240 USD.
- Buying to Open a Put option for expiry date 18-Aug-23 at a strike price of 4235 USD.
This strategy profits if the S&P 500 stays between the two inner strikes, which in this case are 4240 and 4555, by expiration.
The net premium received for this trade is 180 USD, the margin impact for this trade is 79.86 EUR. The maximum risk for this trade is -320 USD, with a maximum profit of 180 USD.
The breakeven points for this trade are 4238.2 and 4556.8. The trade has a probability of profit of 63.10% based on the delta's of the short-positions.
As with any strategy, there are always risks involved:
Price Risk: If the S&P 500 index moves significantly and goes beyond the breakeven points of 4238.2 or 4556.8 at expiration, the trade will result in a loss. The maximum loss for this trade is 320 USD, at expiration.
Early Assignment Risk: There is no risk of early assignment with SPX options as they can only be exercised at expiration and always cash-settled (meaning no delivery of underlyings).
Strategy: Vertical Credit Call Spread (Bearish)
The Vertical Credit Call Spread, also called a Bear Call Spread, is a defined risk strategy that aims to profit from a decrease in the stock's price, or a price increase that doesn't surpass the short call of the vertical spread. This is achieved by selling a call option at a certain strike price, and simultaneously buying another call option at a higher strike price to limit potential losses. The maximum profit is the net premium received for setting up the trade, while the maximum risk is the difference between the strike prices minus the net premium received.
The option strategy consists of two parts:
Buying to Open a Call option for expiry date 18-Aug-23 at a strike price of 4545 USD.
Selling to Open a Call option for expiry date 18-Aug-23 at a strike price of 4535 USD.
This is a credit spread as the premium received from the short call is greater than the premium paid for the long call, resulting in a net premium received of 265 USD. The margin impact for this trade is 653.29 EUR. The maximum risk for this trade is -735 USD, with a maximum profit of 265 USD.
The breakeven point for this trade is 4537.65 USD. The trade has a probability of profit of 74.88%, based on the delta of the short position.
A Bear Call Spread is a bearish strategy that profits from a fall in the underlying asset's price or a fall in the implied volatility. It provides a defined risk trade with the maximum loss being the difference between the strikes minus the net credit received.
Risks involved with this trade:
Price Risk: If the S&P 500 index increases beyond the breakeven point of 4537.65 at expiration, the trade will result in a loss. The maximum loss for this trade is 735 USD
Early Assignment Risk: There is no risk of early assignment with SPX options as they can only be exercised at expiration and always cash-settled (meaning no delivery of underlyings).
The strategies explained above are short volatility/limited reward strategies intended to take advantage of a higher theoretical probability of profit. There are of course a lot of other strategies possible. For example: if expecting a significant directional move, you can consider owning a long put or long call strategy, or a long put spread or long call spread. In a future article I'll explain the differences between the short and long strategies in general.
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