I’m keeping an eye on a 112 / 118 / 124 put butterfly spread that crossed Monday or Tuesday for 46 cents. What caught my attention was the volume. 60k/120k/60k. The trader paid $2,760,000.00 and risks the same. The potential profit is about 15 times that or 30,000,000.00. The probability that the $SPY falls below 118 is 17%.
How did they target this particular spread? The logic on the chart is semi-clear. You have some good resistance/support at 126 (March, June 2011) again at 118 (October, November 2011) and further out (August, September 2010). This trade expects the $SPY to pull back atleast beyond the high of April 2010 by September expiration. On first glance an agressive bear trade on the $SPY. I’m most perplexed by the choice of the September timeframe.
Just looking at the charts can’t be the whole story. We’re in the mist of a pissing contest in Washington and the rating agencies are saying, ‘Hey Washington don’t forget about us… we’re gonna be here” no matter who pisses the farthest.
I’m making a wild guess that a crack team of analysts built a nice excel spreadsheet. And the conclusion was, one way or another, Washington WILL raise the debt ceiling AND the rating agencies WILL downgrade US debt. Their excel conclusion must have been 118. But maybe this is some elaborate type of hedge! I’d love to speak with whoever put this trade on!