This SPY Calendar Put Spread Can Net 431%
Bearish play with a target stock price of $581
Strategy has +431% upside potential and 10% undervalued
| Strategy: Long SPY Calendar Put Spread | |
| Sell 31-Jan-25 581 Put | 5.07 |
| Buy 21-Feb-25 581 Put | 6.97 |
| Debit: | $1.90 |
Option Profit Calculator Results for SPY Calendar Spread at 31-Jan-25 Expiration
In this scenario, the optimal stock price for the option strategy would be $581.00 on the date of the first expiration, January 31, 2025. This is equal to the strike price of the options in the spread. Since there is notable downward pressure in both the market and SPY, and the strikes are below the current stock price of $600.45, the spread is taking advantage of the market's bearish bias. If the stock price is $581.00 at expiration, we can benefit from the 31-Jan-25 put, which we sold, expiring worthless, and the option that we are long, the 21-Feb-25 put, will still have time premium built in.
Since we do now know what the exact implied volatility will be on January 31, we can use our historical data to make an educated estimate to help us calculate the value of the 21-Feb-25 option. Applying the median historical implied volatility of 18.3 from similar options, the theoretical value of the put is 10.10 at the date of the 31-Jan-25 expiration. Using the above assumptions gives us a potential upside of +431% for this calendar spread.
SPY Calendar Spread Value vs. Market Price
According to Market Chameleon estimated value, SPY Calendar Spread is trading at a 10% discount to historical benchmark.
If we use historical data to measure how similar spreads in SPY were priced in the market, the 4-year average price was 2.11, with a high mark of 3.44 and a low of 1.38.
Currently, the calendar put spread is bid at 1.81 and offered at 1.90. The midpoint of the spread is 1.85.
If we use 2.11 as our historical fair value benchmark, the current market ask price is at a 10% discount, while the current market midpoint represents a 12% discount.
| Current Price | Historical Values of Similar Spreads | ||||
| Bid | Ask | Midpoint | Average | High | Low |
| 1.81 | 1.90 | 1.85 | 2.11 | 3.44 | 1.38 |
Takeaway
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NOTE: Stock and option trading involves risk that may not be suitable for all investors. Examples contained within this report are simulated And may have limitations. Average returns and occurrences are calculated from snapshots of market mid-point prices And were Not actually executed, so they do not reflect actual trades, fees, or execution costs. This report is for informational purposes only, and is not intended to be a recommendation to buy or sell any security. Neither Market Chameleon nor any other party makes warranties regarding results from its usage. Past performance does not guarantee future results. Please consult a financial advisor before executing any trades. You can read more about option risks and characteristics at theocc.com.
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