The markets have appeared to be preoccupied with the BREXIT vote all week. The conventional wisdom has the BREXIT vote failing and markets trading higher as a result. I doubt that assessment, but I saw a trading opportunity that didn't really depend on my "knowing" the answer to BREXIT's ultimate effect on the British and world economies. 

 

Last Thursday, I was prompted to sell the SPX JanWk4 spread at 2030/2040 when I observed the large lower shadow on the SPX candlestick. SPX had traded as low as $2050 intraday, but then bounced strongly to close at $2078. I interpreted this as evidence that support had been reached. So I sold the SPX JanWk4 2030/2040 put spread for $1.30.

 

Today I looked at the position, thinking I would close today or tomorrow before the BREXIT event. We were profitable, but only by 5-7%. VIX had moved much higher since I entered the trade, closing at 21.2% today. That left me with a choice: 1) take my modest gain and close, or 2) play the BREXIT event.

 

When I was looking at this trade this afternoon, SPX had traded up by $13 to $2091 since I sold the 2030/2040 put spread. At that price, the JanWk4 2040 put had a 96% probability of expiring worthless Friday. SPX closed at $2119 on June 8th; SPX's all-time high close was 5/21/15 at $2131. Breaking that all-time high at $2131 on Friday seems highly unlikely.

 

From all of the market commentary and trade action this week, I would expect a bullish market reaction if BREXIT fails. Therefore, assuming we get a negative BREXIT vote Thursday and the market trades higher, how high may it go? The probabilities of the 2130, 2140, and 2150 calls expiring worthless Friday were 90%, 95%, and 97%, respectively at about 1:30 pm CT this afternoon when I was evaluating this trade. A prediction of SPX below $2130 at Friday's close seems pretty safe to me. So I sold the SPX JanWk4 2130/2140 call spread for $1.30 this afternoon with SPX at $2091. SPX pulled back a bit into the close at $2085. VIX also moved higher this afternoon, closing at 21.2%. Updating both SPX and VIX, the probability of the $2130 call expiring worthless is now a touch higher at 91%.

 

This should be a solid position. The JanWk4 options expire Friday at the close. SPX is now $45 below the short strike at $2130. A move of that magnitude in two days would be extraordinary. In addition, IV will most likely drop Friday morning after the BREXIT news, pulling much of the value out of both of my JanWk4 SPX spreads.

 

Now, for the rest of the story...