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This morning I am recommending a call option on the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS).
We got a short-term rally this week that took the S&P 500 higher by over 6% in just a few days, but yesterday’s 2.5% loss for the index showed why these rallies are not to be trusted.
I would characterize the past week’s action as a snap-back move. As I’ve mentioned before, when everyone is on one side of the trade, the market will often swing back in the other direction, which is what we saw this week.
In order to get a more sustained rebound, I think we will need to see a successful retest of the lows that were set on Dec. 24-26. Of course, that would mean another trip down to the 2,350 level for the S&P. But if that bottom can hold, it’s possible we could see a much more extended rally.
However, that’s a big “if.” If recent support gives way like it did back up at the 2,640 level, then the market could be in store for a much deeper decline.
A Bearish Call
SDS is a 2X-leveraged, inverse exchange-traded fund (ETF) for the S&P 500 index. In other words, for every 1% the S&P moves lower, SDS should move higher by 2%. So, this is essentially a bearish trade on the S&P using call options.
If we look at the chart below, we see the SDS rising as the S&P 500 falls. That inverse relationship is what makes a call option on SDS a bearish position.
If the S&P 500 tests its recent lows or breaks below support, we could make a big profit. With the market already moving 1-2% a day, SDS could move up or down quickly. This is a high risk trade, and I recommend taking a small position.
Buy to open the ProShares UltraShort S&P 500 ETF (SDS) Mar 15th $51 Calls (SDS190315C00051000) at $1.75 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.