Remember all that talk of a September rate hike by the Federal Reserve? Yeah, that’s off the table. So says today’s August jobs report, which fell far short of expectations. The S&P 500 Index and its oft-watched and ever-liquid companion, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), are rallying modestly on the news.
The wizards of Wall Street were looking for 180,000 new jobs to be created last month. Turns out they were overly optimistic. The U.S. economy gained a mere 151,000 jobs while the unemployment rate held steady at 4.9 percent.
With the SPY popping this morning, the world over are hoping this morning’s jobs report will be the catalyst to finally awaken the market from its slumber. Indeed, it’s high time the S&P 500 divorces the 2,170 level and moves on with its life.
In case you hadn’t noticed, the large-cap laden S&P 500 first tagged 2,170 on July 14 and has been circling it in a tight range ever since. And while opportunities have emerged beneath the surface, it would do us stock watchers some good to see a bona fide trend finally take root.
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To put the low-volatility ebb in context, consider this: The 30-day historical volatility of SPY sits at a lowly 5%. It’s been more than a decade since volatility reached such depths.
The SPY Jobs Report Trade
If you think today’s jobs report was the final nail in the rate-hike-off-the-table coffin and that stocks can get back to their rudely interrupted ascension, consider the following trade on SPY.
Buy the Oct 218 calls for $3.25. Like all call option trades your risk is capped at the initial trade cost, or $3.25 in this case. To lose the entire nut the SPY would have to sit below $218 at expiration. To limit the loss I suggest bailing if the ETF slips below the 50-day moving average at $215.
If the $3.25 price tag is too rich for your blood, no sweat. Go ahead and buy the Oct 218 call, but sell the Oct 223 call against it. This turns the trade into an Oct 218/223 bull call spread. The net debit (and risk) drops to $2.40. The reward is $2.60 and will be captured if SPY rallies above $223 by expiration.
As of this writing, Tyler Craig owned bullish positions on the SPY.
