Traders wondering when the volatility lull will finally end would do well to heed seasonality. Though September has come in like a lamb there’s always a chance it will reveal why its reputation is something keeping wary investors up at night.
Lest you were unaware September has historically been the worst month of the year for stock prices.
Someone needs to tell the market to stop taking the fall season so literally.
Whether you view seasonality as ironclad or simply want to take measures to reduce exposure before the storm, now is as good a time as any to consider bearish plays on the S&P 500. Options on the exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY) should do the trick. They’re liquid, incredibly flexible, and provide protection against market-wide turmoil.
The ultra-low level of the CBOE Volatility Index (VIX) is currently keeping the price of put protection in check.
SPY Stock Chart
For the uninitiated, put options are the go-to vehicles for profiting from the market’s downfall. These derivatives lock in the right to sell the SPY shares at a predetermined price. The value of the put option rises in tandem with a decline in the market, which should be quite intuitive.
Let’s say you own a Dec put option granting the right to sell the SPY at $220 for the next three months. If the SPY plummets to $200, then having the right to sell it at $220 becomes quite attractive. The lower the underlying stock falls, the more attractive your locked-in sell price is. Got it?
From a technical standpoint the SPY ETF is healthy as a horse. The trend on all time frames is pointing higher and any and all dips have been bought up in short order.
Perhaps the only feather in the bears’ cap (at least from a charting perspective) is a bit of slowing momentum. I’d suggest viewing that particular signal with a grain of salt, however. The rapid rise from the Brexit low was destined to slow.
The SPY Put Protection Trade
To protect whatever stock collection you’ve acquired against volatility’s return, you could buy December SPY put options. To curb the cost, consider going 5% out-of-the-money and grabbing the Dec $207 puts for $3.16.
The risk for this particular insurance policy is limited to the $316 paid at trade entry.
If you’re buying one put for every 100 shares of SPY you own (or its equivalency — roughly $22,000 of stock), then the cost is a scant 1.4% of your total portfolio value.
At the time of this writing Tyler Craig owned bullish positions on SPY.
