Today I want to show you a cheap shot, meaning taking a stab at the market, putting on a low-risk trade for less than $100.
We’re going to do this with a butterfly spread. I think it’s the most cost-effective way to take a stab at the market or taking a shot directionally.
The Trade Setup
Keep in mind that I’m pre-recording this video.
You can set up these types of trades if you’re looking for some speculative thoughts and ideas. The whole point and concept is to learn the theory, the concept, and ideas and then give it a shot and test things.
Quick note: You wouldn’t do these trades with your full capital amount. These are speculative trades, meaning take a few dollars and maybe give it a shot. Sometimes they’ll work out and sometimes they won’t.
Here’re some thoughts on how you can put on an option trade for less than $100. It’s just $55 at this exact point.
Right here, we’re looking at a butterfly spread.
If I’m looking at the SPX, I went out 37 days from today, and today is June 11th. You’ll probably be reading this into the future.
When I put this trade on, I was looking at the VIX – it’s 15.91 now. If you look at SPX, the reason why you may want to do this type of trade is to look at it like this.
Here are thoughts and ideas.
This market has been going up for like five or six days in a row.
And if you’re expecting a little pullback even if it’s 30-40 points, something like this like a cheap shot could work. And since you’ll be reading this later in the future, you might be able to see if this pans out.
This may or may not work, but I’m risking $55 – it’s a cheap shot.
You could bump up a couple of contracts. Let’s say I do two or three contracts.
Then I’m risking about $110. So for about $100 right here, I could put two contracts. And what this do?
You can see here’s 2810 in July. I’ve bought those for protection.
Sold the 2790 and bought 2770. All on the put side.
The one that I sold was 2790 compared to our current price; it’s a little further out. Let me show you that.
It is right here and is at the money is way over here. So about 2900.
It’s a pretty good spread, basically about a hundred points away. But if you pull back 2-3 days or 1-2 days the market where our trade doesn’t have to go all the way there. It could just come all the way here.
And you can still profit a little bit.
What is Good about These Butterfly Spreads?
They’re cheap to put on – between about 110-120 for two contracts, and after a few days, you know the theta starts to kick in.
Remember, we have about 37 days. We could just almost let this sit for a while.
Now you see this curvature starting to ramp up. Notice this white line starts to ramp up. If this stays and hangs out here, I might be out $55. If it continues to move up, I’ll be out $55 again.
If it does pull back, I don’t need it to pull back to 2790. If it goes to even 2830 on my $110 investment, I make about three times that money. I make about $320. If it goes to about 2820, I make about $370.
We are looking at this trade and set up selling 2790 (four of them), buying the 2810 (the puts), and buying 2770. You’re paying 55 cents for the trade, so I did two sets of those.
And here’s how that trade would look, and there’s a setup idea for you.
The reason why I might do a trade like this is because we’ve been just heading up for quite a while.
Could we continue heading higher – 2950?
Yeah, absolutely. We could go to 2950, and then I mount my $110.
But in this case, $110 is not too bad to take a shot.
Can You Ramp It Up?
Of course, you can ramp it up. That’s an idea for those of you that are wanting to trade a little bit larger.
Let’s say you’re doing a 10 to 20 spread or a 2010 spread. You’re putting in let’s say $550 or $600 here on the spread with a possible chance of making about 1600 if that works out.
You could use this as a little insurance idea as well. You could use it as maybe just a speculative idea. However, I would be cautious. You don’t put these on every single week.
But if you’re trying to take a stab, you’re coming into all-time market highs, and you have 5-6 days all in a row without a red day, something like this could be an interesting play.
You could also do this on the upside if things were going down. Then you thought it’ll counter-trend bounce – you could do that as well. Or even if you think things are going to continue heading higher, you could do speculative plays like that as well.
Key Point: It’s a cheap way to speculate and to take a stab. You can do these things on the earnings trade.
If you’re doing a single contract and experimenting with options, you can put something like this.
Let me show you what that looks like.
At most, you’re risking $55, and you don’t have to let this trade expire. You could take it off early. If it does just hang around there for a few days, that’s better for you. If it happens immediately, it actually may not be as good because that theta decay doesn’t have time to kick in.
You could do it, in this case, 37 days. If you think it’s going to happen much sooner, I could go ahead, and let’s say do it maybe July 1st, maybe 50 days June 26th.
Watch how quickly that theta starts to kick in if I do it that way. You don’t have to spend as much.
Here is June 26th and you can see here I’m spending about $50. We go to June 19th I’m spending again almost about the same amount. But the theta decay will kick in way quicker.
If I go a couple of days into it, you can see I’d be out my money if the trade doesn’t work out. Sometimes it’s not even worth the Commission’s to sell these back. You just let them expire, and that’s the end of it.
Shorting the market for less than $100 is possible.
But this is not something you may want to do every single day, every trade.
However, it’s another tool in your toolbox.