Once a week I like to report about a block trade in this space. This week I’m going to discuss a trade, but it does not qualify as a block trade. In fact it is a one lot. However, this trade is pretty interesting as it takes advantage of two recent developments in the option markets - Weeklys and Extended Trading Hours.
I have neighbor who is a pretty frequent trader in the SPX option and S&P futures market. We’ll call him Larry to protect his identity. Neighbor Larry was telling me a few weeks ago how he likes to take the other side of the market move around the monthly employment report. Apparently he’s been trading S&P 500 E-Mini futures around the employment number for years and, according to him, has been pretty successful doing so.
After hearing Larry describe how he likes to trade the employment report, I suggested he take a look at SPX options since they are now open at that time. I also told him he may want to consider SPX Weeklys that expire on the Friday of the employment number.
Last week, he took my advice, and embarked on his first option trade during extended trading hours. About 30 minutes after the employment number was released the S&P 500 futures were down about 25 points. According to Larry, this was an indication that the S&P 500 would open at around 1920.00. He seized the moment and sold 1 SPX Sep 4th 1920 Put for 10.50 (astute readers will note this option expired on Friday, the same day as the trade). As a side note, he already owned some longer dated SPX puts and just sold this contract with the expectation that the S&P 500 would finish the day over 1920. The payoff at the end of the day on the 4th along with two significant price levels highlighted appears below.
Larry described this trade with all sorts of excitement. Note in the payoff diagram above the S&P 500 came very close to a level where the trade went from a winner to a loser. Larry said it was tough, but he held on when it looked like the market was going to move lower. He also was very excited when the final S&P 500 print on the day came a little more than a point above the strike price of his expired short put.
The next employment report will be Friday October 2nd before the market opens. Many smart people will anticipate the outcome of the report and how the market will react. The one certainty I have is that Larry will be watching the October 2nd SPX options during extended trading hours for his next employment report oriented SPX option trade.