A 9x reward opportunity on SPX: Butterfly & Put Vertical Spreads

Strats Team
Oct 7
6 min read

Updated: Oct 14

In this brief, we will look at an interesting opportunity arising through a likely market surge amid the lack of US government data during the shutdown. Delayed data is historically perceived as beneficial, as equities tend to appreciate on anticipation and optimism as we head into the final quarter of the year.

Date: October 7, 2025

Asset: S&P 500 Index (Ticker: $SPX)

Distribution: Pre-Market

Last Traded Price: $6740.28

Recommendation: Moderately Bullish

Strategy: Call Butterfly & Put Vertical Spread (Bull Put)

Moneyness: Out-of-the-money (OTM)

Investment Horizon: 10-14 Days

Exit Strategy: On-demand / Carry through expiration

Summary

Data on unemployment claims, hourly earnings, non-farm payrolls, and the overall unemployment rate in the US is expected to be delayed due to the ongoing government shutdown. This lack of data prompted equities to rise in optimism from a historical standpoint. It could likely be no different this time. To exploit this opportunity, which aligns with the technical strength shown by the S&P 500 stock market index for a series of months since the 90-day tariff pause announced by the current administration, we have come up with a couple of trade perspectives that could likely provide an asymmetric opportunity that is yet to manifest in the coming days across the stock markets in the US.

Two Trades

Long Call Butterfly for a debit
Short put vertical (bull put spread) for a credit to finance the debit incurred opening the butterfly

Why open a short put vertical?

If there's a strong bullish conviction in the underlying asset, it is traditionally considered good practice to sell out-of-the-money options (in this case, a spread, as we trade defined risk strategies to limit risk in a worst-case scenario).

Chart

Examining the daily chart, it is evident that the price has been continuing its long-standing upward trend and has been respecting the trendline support shown in the figure. A naive approach is to follow the trend, which has been proven to be a successful strategy for decades. Price has also broken out of resistance zones, continuously making new higher highs and higher lows.

As shown in the figure, the profit zone indicated in the green box is realized when the price enters the zone for a long call butterfly trade that is slightly tweaked to form a "broken wing" setup from a traditional butterfly. This is done because we don't want to limit the upside and let the price rise as much as it wants, while we gain more alpha, and also reduce the cost basis incurred to open the position. We will examine the trade construction below to understand how to achieve this phenomenon.

As the price rises into the green zone, the call butterfly position begins to yield unrealized gains. If the price stays around the short strikes at expiration, the position realizes a max profit of about 8 times the cost incurred to open the position, while about 5 times the cost if it continues to rise further above. Let's examine the trade construction and payoff profile to illustrate this in detail.

Trade Construction

Long Call Butterfly (Broken Wing)

Payoff Profile

As you can see, the profit zone begins only after the expected move of more than 1 standard deviation, with the maximum profit on expiration around the short strike at 6900, while opening up room for profit if the price continues to surge higher.

We expect the price to continue surging higher, as per the reasoning explained earlier, and the payoff profile of the call butterfly aligns with this expectation.

Secondly, to finance this net debit position, we could explore selling some put vertical spreads (also known as bull put spreads) to receive net credit for the strikes, which would be sold somewhere at or below the resistance zone shown in the yellow box in the chart. The reasoning here is that these options are likely to expire out of the money with zero intrinsic value, as the price stays above the zone.

We need some decent credit so that the position offers a good reward-to-risk ratio, which will limit the max loss in an adverse scenario when the price falls below, thereby making this put vertical spread into a losing position, while also losing the debit paid to open the call butterfly above. Hence, the spreads we sell should ideally give decent credit upfront to limit the damage in an adverse scenario. Note that we don't use stop loss, and the max loss for a spread is typically treated as the stop loss for a trade. Therefore, be prepared to lose what one can afford, ideally around 1% or possibly 2% of the account size, but never more than that. This helps us to stay in the game for longer and live to fight another day.

Now there's a trade-off. To receive more credit, we either have to extend the expiration date further or sell closer to the current strike in short-dated expiration (which is risky).

We'll choose the former and sell OTM spreads with more days to expiration, as the equities are expected to end higher by December, based on seasonality.

Put Vertical Spread (Bull Put)

Payoff Profile

This presents about 25% credit to the max loss ratio, with $500 credit received, which is also the max profit when these options expire OTM on November 21, for a max loss of $2000 if SPX ends in the red zone anywhere below the 6630 level.

But, the typical expectation is that these options are likely to expire worthless, hence the higher probability of profit at 62%.

The second trade finances the cost of the first trade with credit received, which is almost equal to the debit paid to open the call butterfly position for the short-dated expiry, with just 17 days remaining.

NOTE: The trades shown are to be considered for educational purposes only and may be hypothetical. Please consider this brief, which provides an idea of the trade perspective at a scale suitable for both small and large accounts. The trades taken should be well under Max Risk, which is 2% of the account equity. To have a positive expectancy over a series of trades, there should be NO DEVIATION from the max risk mandate, which is strongly emphasized on every alert.

Exit Strategy

We intend to square off both positions on demand for profit as the index moves up in the upcoming days. However, one could let them expire, as this is likely to be a risk-free strategy as long as the SPX stays above the short strike of the bull put spread by November, given the seasonality in Q4.

Conclusion

This is a defined risk strategy with limited risk and a significant payoff in a very short period, arising from the call butterfly position, while also generating additional alpha from the short put vertical spread position.

Thank you for taking the time to read this brief. If you have any questions, please post them in the comments section, and one of our analysts will respond promptly.

Disclaimer: This trading brief is for educational purposes only and does not constitute financial advice. Options trading involves significant risks, including the potential loss of the entire investment. Investors should consult a financial advisor and conduct their due diligence before executing any trades. Please read the risk disclosure at OCC to understand the risk considerations required to trade options. Past performance is not indicative of future results. Do your own research and due diligence, and consult a registered investment advisor before taking capital risks.

Notes on Assumptions: Premiums are based on direct market access tools available at our desks; actual order fills for you as a trader may vary depending upon the time of execution, broker data feed, market access, etc., among many other factors. Charts and technicals exclude fees. Information sourced from external sources mentioned above may not be accurate. Our research is sourced from various data vendors and may not reflect the actuals should there be any conflicts.

Closed Trades Update:

Soon after taking the position, the US imposed 100% tariffs on China for its export control restrictions on rare earths that are used in key components from everyday electronics to defense equipment. This caused a flash crash on Friday. Prior to that, on October 8, we had hedged these trades with a put butterfly, making the payoff profile look almost like a Batman! Basically, we have hedged the downside and later on Friday, we managed to close the position for an overall breakeven, thanks to this Put Butterfly Hedge. Info is shown in the screenshots below: