Butterfly spreads target SPY, IWM

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The SPDR S&P 500 Fund and the iShares Russell 2000 Fund both drew large put spreads yesterday.

The SPY and IWM led the market's total option volume list with 1.27 million and 700,000 respectively. Topping the action in both exchange-traded funds were out-of-the-money March Quarterly put butterfly spreads that traded within minutes of each other.

optionMONSTER systems show that trader sold 60,000 of the SPY March 141 puts for $0.54 while buying 30,000 each of the 149 puts for $1.76 and the 133 puts for $0.21. The volume at all three strikes was more than open interest, so this is a new butterfly.

The three-way spread cost $0.89, which is the maximum risk if the SPY is below $133 or above $149 at that expiration. The maximum profit comes with the fund right at the middle strike.

In the IWM butterfly, the trader sold 99,999 of the 85 puts for $0.65 while buying 50,000 of the 88 puts for $1.24 and 50,000 of the 82 puts for $0.35. Here too the volumes were more than the previous open interest and therefore new activity.

This spread cost the trader just $0.29 but has a maximum potential profit of $2.71. This is the attraction of directional butterfly spreads, which have very low cost and risk while offering high potential payout. But the timing and exact range must be correct, not just the direction.

Both the SPY and the IWM were down fractionally yesterday. The SPY finished at $151.77, just off of Friday's five-year high. The IWM closed at $90.70, also just off Friday's level, which in this case was an all-time high.

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