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Trading FOMC Event Via Bearish Butterfly Spread

Published on December 16, 2015

Trading FOMC Event Via Bearish Butterfly Spread

December 16, 2015

Arguably, the most important day of the year for the stock markets is right here. In about an hr, FOMC decision on interest rates will be announced. Almost everyone is expecting a 25bps rise!

Whatever the FOMC decision maybe, there is a speculative Option trade opportunity on either side. Though, I am bearish, the similar strategy can be used for bullish bias as well.

So in simple terms quickly, here is the trade-

Buy to Open a Broken Wing Put fly (What is a Butterfly Options Spread) for roughly $0.25 to $0.75 debit. Though it is slightly bigger range than I would ideally suggest, but for a bearish bias, it’s too good to pass. It consists of three options-

  • Buy Dec 2020 Put
  • Sell 2 Dec 200 Put and
  • Buy Dec 1975 put
  • All Dec Monthly Expiration i.e. Expires this Friday

Here is how risk/reward chart for the trade look like.

SPX OOM Fly rev

Here are the mechanics of the trade-

  • Thus for 1 contracts it requires $2585 capital (Assuming $0.85 debit).
  • Maximum risk is $585 (if S&P drops below 1980 by this Friday).
  • I will lose only $85 if SPX remains above 2020 by this Friday.
  • Maximum gains are about $1900+/- if S&P expires at 2000 this Friday (Don’t coun’t on it)
  • IF however, SPX is anywhere between 1980 and 2020, this trade will bring solid gains.

Never ever violate money allocation principles. Allocate only what you can afford to lose 100%!!

WARNING: THERE IS A HIGH PROBABILITY THAT THIS TRADE WILL BE A COMPLETE WASHOUT  (Don’t trade it after 1.45pm US Easter time i.e. 15 min before FOMC announcement).

Profitable Trading, OP

Disclaimer- This post is for entertainment only. Do your due diligence before investing any money or following this trade. Options are risk and you can lose all your capital in options.

5 Comments

  • OptionPundit says:

    Soon after FOMC decision, S&P dropped to 2042 and then rose to 2070. Though it would have been profitable to close when SPX dropped, but that would have been difficult to fill due to large movements. As of now S&P is continuing to rally, thus bringing this particular trade under water.

  • OptionPundit says:

    Today i.e. on Thursday SPX dropped to give back all the gains it made post Fed decision. The trade could have been easily closed for nice profits.

  • OptionPundit says:

    Trading FOMC via Broken Wing Butterfly today i.e. 27 Jan 2016 via following >>
    ES futures (expiring this week), broken wing fly 1885/1860/1825 for $2.35 debit. Assumed 100% debit loss upfront as there isn’t much time for adjustments.

  • OptionPundit says:

    Book your solid gains. The butterfly can now be closed for almost +3.40 or so, thus generating +40% in under few hours.

  • Nivea says:

    The markets were in consolidation phase due to weak global cues and FII’s were net sellers in the last week . However the sentiments have changed now and FII’s have started buying again. Morgan Stanley has upgraded Indian equities to overweight. Monsoon expectations are good, and GST is expected to get passed in coming monsoon session of parliament.
    So on positive side there are lot of triggers. On the negative side, FED rate hike and Br-exit are the 2 events which markets will be interested in. FED rate hike can take markets slightly lower for some time. But then again overall trend is expected to be up now for next few months.

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