Traders Turn To SPX Options Trades In Volatile Market

Where do Simpler’s traders turn when the market is seemingly out of control?

They turn back to the basics, and focus on what they can control.

Regardless of market volatility, traders can work through technical analysis to uncover potential trade setups.

SPX options trades offer ‘forgiveness factor’

One chart to watch in volatility, as mentioned previously in Simpler Insights, is the S&P 500, specifically the SPX (Standard & Poor’s 500 Index Options).

The SPX “cash closes” at the end of each trading session. There are no share assignments and no overnight contracts. With no overnight exposure, this limits capital risk to only the amount paid for the options contract.

Allison Ostrander, Director of Risk Tolerance at Simpler Trading, highlighted a squeeze consolidating on the SPX chart showing downside movement. She walked through time frames on the charts and discussed low risk ways to play the potential big moves that could happen.

Allison focused on the risk versus reward setups, and the idea of using broken wing butterfly options plays in the SPX with strike prices into October or November.

“The benefit of this is if the move happens really quick, the broken wing still allows for that profit potential,” Allison said. “We know how this market can trade off volatility. Be prepared.

“The broken wing butterfly kind of builds in that insurance and still allows you that profit potential if this goes completely in the money.”

For Allison, this type of trade is returning to the basics – what she knows and a setup that fits her risk management level.

“I like trades like this because it can make for a very inexpensive trade but allows for substantial profit potential in a volatile market like this,” Allison said.

She cautioned traders to base any trade setups on their personal comfort level for risk and the cost of the options trade.

“It’s a great way to still play this volatility to allow yourself an excellent profit potential to give yourself a little bit of forgiveness factor in case the move goes past your strikes,” Allison said.

She pointed out how the market is signaling continued downward pressure that could reach the year-to-date lows in the SPX set in June.

The SPX is a “go to” index for Simpler’s traders when the market is volatile.

The S&P 500 represents the 500 largest publicly-traded companies in the U.S. Which companies get listed is based on market capitalization (take the number of outstanding shares and multiply by the stock price). This includes companies in sectors such as technology, healthcare, energy, banking, and retail/wholesale, and specific companies such as Apple, UnitedHealth Group Incorporated, Chevron, JPMorgan Chase & Co., and Cosco.

Options contracts in the SPX are executed only on the expiration date and the underlying asset (stock) is not traded. These options do not pay dividends and are settled in cash at expiration. SPX options have various expiration dates that occur daily, monthly, and quarterly.