The bulls are back in the S&P 500 as one type of panic is replaced by another kind: the fear of missing out. But don’t expect another V-bottom to be a sustainable bailout for investors.
For active, self-directed traders, one way to position for the very real prospect of some backing and filling and perhaps an eventual retest of lows is with a vertical spread in the S&P 500 using SPDR S&P 500 ETF (SPY) weekly options.
Everything seems to be quickly coming up roses for bullish investors in the S&P 500. A grinding and extended market top turned on its head, and marked by historic or maybe biblical levels of hysteria, has less mysteriously found itself back in “the middle” on the S&P 500 ETF chart.
This week’s latest round of market tinkering by China’s central bank has assisted the S&P 500. Investors had been bearishly jeering China for its moves to stimulate its markets, but now we’re seeing unadulterated cheers in the S&P 500 as China’s policymakers take aggressive actions even further!
And stateside, the panic of missing the S&P 500 rally gets even better. Investor relief over a Fed Head noting “less compelling” reasons for a move on rates Wednesday has been brushed aside and replaced by contradictory, better-than-expected economic reports — that apparently inspire upward movement in the market.
For S&P 500 bulls, the last couple days have been a “heads I win, tails you lose” situation.
S&P 500 ETF Daily Chart
The daily view of the SPY shows that the ETF has rallied hard the last couple sessions. Actually, it has rallied right smack into an area for potential short or bearish plays after launching from its historic, massively oversold bottom which coincided with last October’s corrective low.
Aside from an overbought 9% gain in the S&P 500 since Monday’s “blink and you missed it” lows and rather aggressive drop of about 50% in the VIX or “Fear Index” to 26%, key zone resistance in SPY is visible from the $198 area to $204.
And with the S&P 500 ETF trading just above $199, traders can look at shorting opportunities in the S&P 500 with more confidence and higher probability of success than a few days ago.
The 3% wide range in the S&P 500 holds the prior December to February lows, 50% and 62% retracement levels and March to July lows, which helped sustain one of the SPY’s tightest and longest trading ranges on record.
Additionally, more than six full years from what is surely a generational low in the S&P 500, it’s plain and simple to view market strength from the latest correction as more suspect; particularly when it’s the result of a V-bottom.
S&P 500 ETF Bear Put Spread
One simple SPY spread to fade the V-bottom into zone resistance and give oneself some wiggle room, is the September 5 $204/$206 bear call spread. With shares of the SPY ETF just above $199, the vertical is priced at 55 cents mid-market.
Neutral-to-bearish traders should make this trade for a credit of 55 cents or better. At the end of the day, the out-of-money positioning of the strikes leaves the S&P 500 room to gain 2.75% before it starts to lose money on an expiration basis.
The spread expires next Friday, and if the S&P 500 either sits, pulls back or moves modestly higher next week, traders will be able to take in the full credit.
If the S&P 500 should fail to react as anticipated and another V-bottom works its magic for bulls, the vertical’s maximum loss is $1.45 above $206 which would require an additional 3.5% of rallying from here. And in our view, both bulls and bears are likely to prevent that move from occurring.
Disclosure: As of this publishing, investment accounts under Christopher Tyler’s management do not own positions in any of the securities or their derivatives mentioned in this article, but may initiate in the future at their discretion. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
