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If You’re Having Doubts About a Santa Claus Rally …

Here’s a holiday S&P call option trade for Santa's skeptics


With the broader market indexes up 3% across the board in early trading yesterday, the bulls received quite the post-holiday surprise.

The Bespoke Investment Group said that if the S&P 500 Index closed up at least 2.03%, it would mark the best Monday after Thanksgiving since 1941.

With the S&P 500 closing up 2.92% Monday, it’s safe to say that this year’s “Cyber Monday” was a day for the history books in the markets. So, might this be the spark to needed to light a year-end Santa Claus rally?

Perhaps, but I’m doubtful. Given the multiple support levels broken during the pre-Thanksgiving selling fest, we have a notable amount of overhead resistance to contend with. We also remain in a downtrend, which makes any rally suspect.

Those taking my same view that Santa Claus might fail to deliver the goods this year should look at initiating bearish type plays into this rally. Bear-call spreads remain a play of choice for me, as they’re a nice way to pocket some instant options income while having a short-term neutral or even negative market outlook.

The bear-call spread, sometimes referred to as selling a call vertical spread, consists of “selling to open” a lower-strike call while “buying to open” a higher-strike call in the same expiration month. The net credit you receive at trade inception represents the max reward. The max risk is limited to the distance between strikes minus the net credit.

With the SPDR S&P 500 ETF (NYSE:SPY) currently trading at $119.70, traders can sell the SPY Dec 125-130 call spread by selling to open the $125 call for around 83 cents, and buying to open the $130 call for 14 cents. The max reward comes out to 69 cents, and the max risk is limited to $4.31. (The prices you collect or pay for each individual “leg” of the trade don’t matter, as long as you enter the position for around a 69-cent net credit.)

Source: MachTrader

Provided the SPY remains below $125 by December expiration, you stand to gain $69 per contract. If Santa Claus does indeed deliver for the bulls and the SPY powers higher north of $130, you could incur a loss of $431.

At the time of this writing, Tyler Craig had no positions on SPY.

Article printed from InvestorPlace Media,

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