An Update on ‘One Way to Play a Spike in SPY Volatility’

  • SumoMe

In this article dated 2/10/16, I highlighted an example of one way to play volatility using options on SPY.  This is an update to that article and is intended simply to educate traders on how to handle trades as they evolve.

(See also One Way to Play Crude Oil Volatility)

The Original Trade

The particulars of the original trade appear in Figure 1.1Figure 1 – SPY Bull put spread (Courtesy

In a nutshell, the maximum profit potential is $456 and a trader would likely want to cut his or her loss if SPY dropped below $177.24 a share.

The Update

As I write, SPY has rallied is now trading at $192.98 and the trade is showing an open profit of $414 with 9 days left until expiration as shown in Figure 2.

2Figure 2 – Updated SPY Bull put spread (Courtesy


As you can see there is $42 of additional profit potential available.

*Is it worth it to hang on for 9 days in hopes of garnering those additional dollars?

*Or is it best to exit now, take the profit and run, and eliminate all downside risk?

The truth is that there is no right or wrong answer and each individual trader would have to make his or her own decision.  For what it is worth, given that:

*Holding on essentially involves a potential reward of $42 versus a potential risk of somewhere between $800+ and $2,308, and;

*SPY is below its 200-day moving average, so it is fair to characterize this advance as a “rally in a bear market” (no prediction here, just noting that bear market rallies have a way of reversing quickly and painfully);

*I for one would take my profit and move on.

But if you are an option trader or considering trading options, think about it some.  Because, well, as clearly stated in:

Jay’s Trading Maxim #45: One of the keys to success in trading is learning to make your own decisions (and learning to live with the consequences when things don’t go as hoped).

Jay Kaeppel