The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has been entertaining spectators with loops and whirls of all variety.
While the sharp upturns and dramatic drops in the SPY ETF have prompted oohs and aahs from some onlookers, others are beginning to tire of the meaningless drama.
You see, for all its fury, the recent two-sided action has amounted to nothing more than a tempest in a teapot. Net-net little ground has actually been gained or lost since the S&P 500 hissy fit began in mid-February.
If recent behavior is any indication, however, it appears an end to the frustrating range may be in the offing.
Unlike prior selloffs, Friday’s swoon was swiftly bought resulting in the formation of a higher pivot low in the SPY ETF. This increased aggression by dip buyers marks a subtle change in character for the heretofore sluggish cohort.
If their new-found pace of buying continues, a break to the topside of the S&P 500’s trading range looks like a good bet.
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Hedge Your SPY Bets With Put Spreads
While an upside breakout is certainly favored, it’s far from assured. As such, entering a high-probability trade that profits even if the S&P 500 ETF continues its rangebound behavior is the way to go.
Bull put spreads offer just such an opportunity.
Sell the SPY May $204/$201 bull put spread for 30 cents credit. Consider it a bet SPY remains above $204 by May expiration. If this happens, you’ll capture the max reward of 30 cents.
The max risk is limited to the distance between strikes minus the net credit, or $2.70, and will be lost if the SPY ETF falls below $201.
The spread offers a potential return on investment is 11% as well as a probability of profit of 81%.
The SPY is gapping higher this morning, so if any type of gap fill commences, you should be able to sell the spread at an even higher net credit.
As of this writing, Tyler Craig owned short call spreads on SPY.
