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Shorting WEEKLYS in a Weak Market

I want to bet on a continued drop in the market, and take advantage of a kink in the SPY weekly skews.

The following option trade also includes a position with weekly expiration, not monthly. WEEKLYS are options that are listed with approximately one week to expiration.

Here's some info from the CBOE on weekly options that might prove useful.

With the market in the midst of a free fall, the skew in the SPDR S&P 500 ETF (SPY) - Get S&P 500 ETF TRUST ETF Report WEEKLYS is turning very steep. I want to bet on a continued drop in the market, and take advantage of a kink in the weekly skews.

The Livevol Pro Skew Tab is included below. Note the kink in the 104 weekly puts.

SPDR S&P 500 ETF (SPY) Skew
Source: Livevol

View Chart

Trades: Buy to open 1 SPY September 106 put for $3.11 and sell to open 2 SPY August 27 (W) 104 puts at $0.73.

The net debit is $1.65.

For those that have strict margin requirements, buying an SPY August 27 weekly 99 put for $0.10 may actually be cheaper than doing this trade naked.

Since the market is swinging around, any purchase of this 1 x 2 for $1.65 or less, is the goal. The individual prices of the options are less important.

The goal of the trade is to scalp skew and ride some short deltas if the market falls another 1-2%. If the market rises, we can sell more options in the next weekly cycle once this week expires (note we bought the September monthly options for this purpose). Hypothetically, we can sell several weekly options as they expire if the market does rally.

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The risk here is to the downside on a large down open (i.e. 2.5% or more). If the market has another day like today, we can close for a win pretty easily.

At the time of publication, Ophir Gottlieb was long SPY September puts and short SPY August (W) puts.

Ophir Gottlieb is managing director and head of client services and algorithmic trading at the financial data services company Livevol. He has worked as an equity option market maker and prop trader on the NYSE ARCA exchange floor since February 2008.

OptionsProfits, a new provider of options news from TheStreet, educates investors and acts as a catalyst for trading.

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