‘Tis the Season for Bullish SPY Options

by Tyler Craig | November 4, 2013 11:06 am

‘Tis the Season for Bullish SPY Options

Traders upset over last week’s minor bout of profit taking in across the board can take comfort in the calendar. As carefully documented by the Stock Trader’s Almanac[1], November officially kicks off the so-called “best six months” for both the Dow Jones Industrial Average and S&P 500, and thus for the SPDR Dow Jones Industrial Average ETF (DIA[2]) and SPDR S&P 500 ETF (SPY[3]).

Historically, the six-month period from November through April delivers stock returns far superior to the May-to-October time frame. What’s more, November through January is the best consecutive three-month span of the year.

The bulls can also factor trend continuation into their arguments for additional upside. This from the Wall Street Journal[4]:

“In the 33 years the S&P 500 has risen by at least 10% from January through October, the stock benchmark on average has gained another 5.7% in the final two months of the year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The index has risen in 28 of those 33 years.”

If past is prologue, the market has a strong chance of tacking on additional gains to its already impressive 24% rise.

Of course, with the SPY having run some 8% since the Oct. 9 low, a continuation of the current pullback might be in order before the year-end rally takes root. Indeed, a deeper retracement would offer a lower-risk entry point for traders looking to bet on the bulls’ dominance into year’s end.

SPYchart 300x188 'Tis the Season for Bullish SPY Options
Click to Enlarge
Tacking on an additional 5.7% from current prices would carry the SPY to just north of $186. While I think $186 probably errs on the side of over-optimism, the options market provides some pretty attractive strategies for doubling your money, even if the SPY merely rises half as far by the close of 2013.

You could purchase the SPY Jan 2014 176-182 call spread by buying the Jan 176 call and selling the Jan 182 call for a net debit of $2.65. The max risk is limited to the initial cost of $2.65 and the max reward is limited to the distance between strikes minus the net debit, or $3.35.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Stock Trader’s Almanac: http://www.stocktradersalmanac.com/sta/home.do
  2. DIA: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIA
  3. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  4. Wall Street Journal: http://blogs.wsj.com/moneybeat/2013/11/04/past-points-to-big-finish/

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