I think that those who short SPDR S&P 500 ETF Trust (NYSEARCA:SPY) this year are ignoring the underlying strength of the economy. For example, this week we have interest rates losing steam. Remember that this was the original reason why stocks corrected in February.
There are a lot of good, fundamental reasons battling a slew of inflammatory headlines that are likely to be transient. So my bet remains that the SPY will be higher in the midterm than today’s levels, and therein lies my trade.
This morning, markets are under pressure on old news disguised under a new headline. “Italeave” worries are scaring traders in Europe and it’s spilling into the U.S. markets. But this is old news. Stocks have already shrugged off similar fears like Grexit and Brexit. Both of these situations have since faded as this shall too.
In addition to interest rates, markets are also ignoring a lot of other good developments that are supportive fuels for SPY. The U.S. Fed rhetoric has gone mild once again. More talking heads of the U.S. Fed are now sounding like the old Janet Yellen Fed rather than a new hawkish one.
There is fear as the VXX shows this morning, but I believe it’s a false tell. For confirmation of fear, frothy stocks should fall hard. Last week we had a few spikes in fear that faded, all the while stocks like Netflix, Inc. (NASDAQ:NFLX) set new all-time highs. Scared markets don’t bid froth, they run for value.
Cooler heads will prevail on most fronts in the global economic negotiations. I think the U.S., China and members of Nafta have great incentives to eventually come to terms. That news will cause another leg higher in equity markets.
Support for the rally will likely come from solid fundamentals in mega-caps like Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). These companies have been tremendously profitable business and bullet proof P&Ls.
Today, I am set to capture the ensuing eventual rally with a pair trade with no money out of my pocket now.
SPY Trade Idea
The Upside Bet: Buy the SPY July $274/$276 debit call spread, where I pay 80 cents to open for a chance to double my money if price rallies through my strikes.
To eliminate my out-of-pocket expense, I sell downside risk into unreasonable fears.
The Bank (Optional): Sell the SPY June 22 $265/$260 bull put spread for 85 cents. This is a bullish trade with 75% odds of success.
The result of the pair trade is a net credit. As long as the price stays above my sold put spread, any premium I get from closing my call position would be incremental profit.
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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.
