The freight train carrying U.S. equities higher is chugging along nicely. With Friday’s sweet reversal, the SPDR S&P 500 ETF Trust (SPY) has now traveled 14.3% from its Feb 11 low — a monster rally if there ever was one.
While SPY bulls seem to have complete and utter control, stock lovers shouldn’t rest on their laurels — now’s the time to grab a bit of protection just in case we see some giveback in the coming months.
The parabolic run in the S&P 500 Index isn’t exactly unique — we’ve seen similar recoveries almost once a year since the dawn of our bull market in 2009. Virtually everyone eventually experienced a healthy pullback in the month or two following the moonshot, as the adjacent chart shows.
![SPY chart](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Click to Enlarge
Note the angle of ascent was similar to our current bull run.
While the SPY ETF surge could continue, a number of looming resistance levels are giving buyers plenty of reasons to exercise caution following such a sharp ascent. The previous cluster of peaks in the $210 region, along with the downward trendline, are areas where sellers have previously dominated.
And it’s not just the overbought market conditions that warrant a potential bear play. Insurance is cheap these days. The CBOE Volatility Index (VIX), the go-to indicator to assess if options are cheap or expensive, tagged a new seven-month low Friday. Fear has officially left the building, and as a result you can pick up SPY options on the cheap.
SPY Put Spreads for a Rainy Day
If you’re looking to scoop up some S&P 500 protection, now’s the time to strike. To increase the odds the protection will bear fruit we can extend the duration of the trade.
So, rather than using short-term options to play for a pullback, we’ll go out about three months, giving ourselves ample time for a correction to finally strike.
Buy the June $205/$200 put spread for $1.45 or better. The max risk is limited to the initial $1.45 and will be forfeited if SPY sits above $205 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $3.55, and will be captured if the S&P 500 ETF sits below $200 at expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.