The denizens of Wall Street awoke to yet another disappointment on Monday. Stocks jumped higher right out of the gate on hopes that the long-awaited, and much-needed, bounce had finally arrived.
And yet again, the up-gap was sold into with aggression quickly driving share prices back to Friday’s closing levels.
If you’re tiring of the S&P 500‘s bearish ways, you’re not alone. Rather than fighting its continual, indeed relentless, deterioration why not try profiting from it? That way you can view the ongoing bloodbath with pleasure instead of pain.
Let’s first recap the posture of the S&P 500, then we’ll identify an attractive approach to profit from further weakness using the SPDR S&P 500 ETF Trust (SPY).
With the selling deluge greeting investors in 2016, SPY has tumbled below all its major moving averages on heavy volume. The daily chart now sits firmly in a downtrend, betraying the bears’ dominance. It seems a retest of the August/September lows near $187 is in the offing for the S&P 500 ETF.
Perhaps what’s most fueling hopes of a rebound in SPY is the drastically oversold levels we find ourselves at. If the S&P 500 ends up closing today at its current perch it will have closed below the lower Bollinger band for a third straight day, indicating extreme oversold pressure.
The beauty of today’s suggested trade is even if SPY does rebound in the days ahead, you’ll likely still profit. With so much potential overhead resistance, the next rally in SPY should be viewed with extreme skepticism.
The SPY Trade
Bears not wanting to get whipsawed during the next bounce in SPY could consider selling out-of-the-money call spreads. By using the bear call spread, we can structure a trade with a wide margin of error, delivering profits in most potential outcomes.
Sell the SPY Feb $205/$209 call spread for 45 cents or better. The max reward is limited to the initial 45 cents and will be captured if the S&P 500 ETF sits below $205 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $3.55, and will be lost if SPY miraculously rallies back above $209 in the next month.
If you think SPY is able to bounce back a few days this week, then wait until after the rebound to deploy the bear call. You’ll get a much higher net credit. Or, you may even consider using higher strike calls at that point, such as the $206/$210 or $207/$211.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
