Yes, markets are in free fall and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is now down for the year. But it is still up 12% in 12 months after this correction. The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) is already in official correction territory as Wall Street defines it.
So is the bull market over? I don’t think so and therein lies my opportunity. I want to start betting long on the stock market.
Since I am a conservative, fundamental trader I want to leave plenty of room for error. So I take several small bites rather than one big gulp. Also, I build a moat around my trade and set stop losses in case I am wrong.
For this, I will use the SPY options so I can set my time frame later in this year and much lower than current prices. I don’t want to fight this battle in the trenches. I avoid the current headlines and I make my sure risk is finite so I don’t get blown out if I’m wrong.
I realize that the S&P 500 is made up of a basket of stocks, but I believe in the mega caps, which are its heavyweights. These are great companies like Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), or even Amazon.com, Inc. (NASDAQ:AMZN). GOOGL and AAPL are fundamentally sound with tangible values that are on a solid foundation. AMZN has a rosy future with incredible growth.
This market-wide correction has been widespread ignoring the fact that AAPL has a price-to-earnings under 17. That is a perfect example of value and suggests that there is a floor under the stock. If the current fundamentals are to persist, buyers will soon step in after they come to terms with their headline fears.
The media assigned blame for this market tizzy on an out of control spike in the 10-year bond yield. But yesterday that too fell, so there is clearly something else at play and until we figure it out we are vulnerable from the lack of buyers.
How to Trade the SPY
With today’s SPY trade, I am not calling a bottom. I am instead saying that this too shall pass and I bet I know what levels will hold. I sell risk there and if I am correct, I keep the premium I collect for maximum gains.
The Trade – Yes, It Is a Trade: Sell the SPY Mar 29 $240/$237 credit put spread. This is a bullish trade that would yield 15% on risk if price stays above my strike; otherwise, I suffer losses.
If I see a clear turn in sentiment, I would add another bullish layer to this trade to capture upside potential.
The Optional Juice – Debit Call Spread: Buy the SPY Mar $266/$267 debit call spread. Here I spend 50-cents-per-contract for a chance to double my money if prices rises above my spread.
I don’t deploy both at the same time and I will likely not set my entire bet all at once. Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.