The denizens of the Street are all aflutter over the S&P 500‘s coming retest of all-time highs. With its peak just 1% away, surely the bulls will find the mustard to revisit the summit once more, right?
Whether or not the SPDR S&P 500 ETF Trust (SPY) succeeds in its coming breakout bid remains to be seen. But, one thing is assured — the mega resistance looming overhead creates some interesting trading opportunities for SPY bulls and bears alike.
Let’s start with the bull case. From a price perspective, things are just peachy. All short-term trends point higher. The 20-day and 50-day moving averages are trending higher. And despite a few years of choppity-chop, the long, long-term trend of the SPY ETF is still pointing higher.
Matter of fact, the recent range carved out is creating one heck of a high base on the weekly chart.
As the tech analysis veterans like to say, “the longer the base, the higher in space.” Should buyers succeed in the coming breakout bid, they have a substantial launching pad to rocket from.
The SPY ETF Trades
With the heart of summer fast approaching and markets in bull mode, option premiums have descended to dirt-cheap levels. If you’re looking to bet on a breakout here, grab the Aug $210/$215 bull call spreads for $2.50 or better. It’ll double your money if SPY can ascend to $215 by August expiration.
And what of the bear case?
Perhaps the most compelling argument for betting against a breakout is the attractive risk-reward. After all, if the SPY ETF fails at resistance yet again there is a lot of potential downside. See the Aug 2015 and Jan 2016 swoons for example.
Better yet, contrarians hopping in here could use a breach of the $214 level as an exit point. Such a logical, quick stop loss level is delivering a seriously skewed risk-reward ratio. That is, little risk, big reward.
Even if you think it’s coin flip odds that the breakout succeeds, there’s no denying the attractiveness of a bear play here. The cheap option premiums works to the advantage of bears as well. Consider buying the Aug $210/$205 put spread for $1.90 or so. Should the S&P 500 tumble back below $205, a 150% return will be delivered straight to your doorstep.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.