Originally published July 20, 2026 on The Trading Journal (tredey.com). Archived here as part of the Dependability research record.
SPX closed Friday at $7,457.69 with VIX 18.77, FOMC 9 days out. SPX Aug 21 (AM-settled) 7125/7135 bull put spread, ~$130 credit, ~$870 max loss, ~80% POP.
SPX closed Friday at $7,457.69 with VIX 18.77. Defensive sectors led the tape last week, the energy bid extended on Iran headlines, and FOMC is 9 calendar days out.
The trade. Sell the SPX $7,135 put / buy the $7,125 put, expiring Friday morning, August 21, 2026 (AM-settled — the standard monthly SPX settles on the Friday opening print, not the close). Net credit ~$130 per contract. Max loss ~$870. Breakeven $7,133.70. Probability of profit ~80% based on the ~0.18-delta short put.
Why this structure. SPX closed 0.77% lower on the week after the defensive rotation, and the term structure is in mild contango (VIX 18.77 vs. VIX3M 20.54, term ratio 0.91). That setup favors short-premium structures on a defensive bid. A bull put spread keeps the upside open — if SPX rallies through $7,135, the spread expires worthless for full credit.
Strike selection. The $7,135 short strike sits ~4.3% below spot. At SPX 19% IV and 32 calendar days to the Aug 21 expiry, that distance corresponds to a delta of roughly −0.18 on the short put. The 10-point width to the long strike creates the standard risk-defined spread.
Expected Move (1 Standard Deviation)
Using the current VIX as the IV estimate, the 1σ expected moves for SPX are:
| Window | Points | Percent |
|---|---|---|
| 1 day | ±49 | ±0.65% |
| 1 week (5 sessions) | ±108 | ±1.45% |
| 30 days | ±278 | ±3.73% |
| 1 year (252 sessions) | ±795 | ±10.66% |
The 30-day 1σ move is ±278 points. The short strike is 322 points below spot — that puts the short strike ~1.16σ below current. The market is pricing in roughly an 88% probability that SPX stays above $7,135 over the next 30 sessions. The 82% POP estimate reflects theta decay and skew adjustment on top of that delta-based read.
Market context
| Driver | Reading | Source |
|---|---|---|
| SPX spot | $7,457.69 | Friday close |
| SPX 5d return | −0.77% | Computed from closes |
| SPX 20d return | +0.60% | Computed from closes |
| VIX | 18.77 | Friday close |
| VIX3M | 20.54 | Friday close |
| Term ratio (VIX/VIX3M) | 0.91 | Mild contango |
| SPY % above 50d MA | ~72% | Breadth proxy |
| FOMC | Jul 28–29 (9 calendar days) | Federal Reserve calendar |
| Iran/oil | Brent $87 area, Hormuz risk premium intact | News flow |
| Sector | 5d Return | Read |
|---|---|---|
| XLV (Health Care) | +1.6% | Defensive bid |
| XLP (Consumer Staples) | +0.8% | Defensive bid |
| XLU (Utilities) | +0.5% | Defensive bid |
| XLE (Energy) | +2.4% | Iran catalyst |
| XLF (Financials) | −0.4% | Steepener trade |
| XLK (Technology) | −5.5% | Rate-sensitivity pain |
| XLB (Materials) | −1.2% | Industrial slowdown concern |
Defensive-sector leadership paired with a sharp tech selloff is a late-cycle rotation signature. Breadth is still healthy at roughly 72% of large-cap ETFs above their 50-day moving average — the bull trend is intact, just less broad than a month ago.
Structure details
| P&L field | Value | Math |
|---|---|---|
| Net credit | ~$130 per contract | Short $53.90 − long $52.60 (OptionStrat basis) |
| Max profit | ~$130 per contract | Credit received, kept if SPX ≥ $7,135 at Friday Aug 21 open |
| Max loss | ~$870 per contract | $1,000 width − ~$130 credit |
| Breakeven | $7,133.70 | Short strike − credit |
| POP (delta-derived) | ~80% | Short put at ~−0.18 delta |
| Settlement | AM | Settles on Friday morning opening print |
| Last trade day | Thursday Aug 20, 2026 | Position cannot be managed on Friday morning |
Verify the live mid on both legs at the open on Monday. If the gap between bid and ask has widened materially on either leg, skip the trade — the structure depends on a clean two-sided fill at the published width.
Risks to the trade
- AM-settlement pin risk. Because the position settles on the Friday morning opening print, any Thursday-night headline (CPI, geopolitical, Fed leak) can move SPX through the strikes before the option holder can react. The Aug 21 expiry is before the Jackson Hole symposium (Aug 21–23), so there is no Fed-event overlap, but the structure still carries the standard AM-expiry overnight risk.
- Last trade day is Thursday Aug 20. SPX standard monthly options stop trading at the close on the trading day before expiration. You cannot manage the position on Friday morning — your exit must be in place by Thursday close.
- Iran escalation. A Hormuz disruption that pushes Brent above $100 would likely drag SPX through the short strike. Position sizing accounts for the tail at $870 max loss per contract, but if the energy bid extends materially, consider closing early rather than holding to expiry.
- FOMC surprise. A 50 bps cut would invert the term structure and could push SPX 1–2% on the day. Plan to manage through the FOMC release (Jul 28–29) rather than hold through it.
- VIX spike. A VIX move above 25 would inflate the put premiums but also expand the expected move enough that the short strike may come into play. Watch the term ratio — a flip into backwardation (VIX > VIX3M) is the early warning.
Position management
- Profit-take: Close at 50% of max profit, which is a debit of roughly $65 to close (you received ~$130, you give back ~$65, you keep ~$65).
- Stop-loss: Close at 2× the credit received in loss — a debit of ~$260 to close. Beyond that, the structure is no longer asymmetric in your favor.
- Time stop: Close by Wednesday, August 19 close (2 calendar days before the last trade day). AM-settled options lose their time value fast in the final week, and the Thursday Aug 20 last-trade-day means you cannot react on Friday morning.
- Adjustment: If SPX drops within 1% of the short strike ($7,135 × 0.99 = $7,064) with 7+ calendar days remaining, roll the short strike down 5 points and out 1 week for a credit. Do not roll down without collecting a credit.
Alternatives if this spread is too thin at the open
If Monday's open shows the $7,135 / $7,125 mid collapsed (e.g., credit under $80 per contract at the tradeable spread), consider one of these alternatives from the same regime:
| Alternative | Width | Approx. credit | Max loss | POP |
|---|---|---|---|---|
| $7,125 / $7,100 (25-point width, lower short) | 25 | ~$330 | ~$2,170 | ~82% |
| $7,150 / $7,140 (10-point width, higher short) | 10 | ~$260 | ~$740 | ~80% |
| $7,100 / $7,075 (25-point width, much lower short) | 25 | ~$275 | ~$2,225 | ~84% |
The trade-off is credit vs. max loss. The $7,150 / $7,140 has the best risk-adjusted profile (smallest max loss) but requires SPX to stay above $7,150 — which is closer to spot.
If you want to skip the trade entirely, the no-trade path is: SPX inside 1% of a round-number strike, term structure in backwardation, or a major data print within 48 hours. None of those apply this morning.
Disclosures
Not investment advice. Educational content only. All options involve substantial risk of loss, including the full amount of premium paid for debit structures or the full width of spreads for credit structures. The expected-move and POP estimates above are model outputs and do not represent guaranteed outcomes. Verify all strikes, premium, and liquidity with your broker before placing any orders.
Past performance is not indicative of future results. Forecasts are based on market data available at publication and may be revised as new information becomes available.
Disclosure: the journal recommends OptionStrat for visualizing strategy P/L, breakevens, probability of profit, and greeks — the platform it uses daily. "Build this trade" links on this site are affiliate links; the recommendation is on the merits.
Disclaimer. This content is published for informational and educational purposes only. Nothing here is investment advice. Trading options involves substantial risk of loss and is not appropriate for every investor. Past performance, including the journal entries on this site, does not guarantee future results. You are solely responsible for your trading decisions.