The S&P 500 closed above 2,900 yesterday, but there’s still plenty of volatility in the market. Because of the inversion of the yield curve, recession is on everyone’s mind.
There’s also the ongoing trade war between the U.S. and China. While traders held on to hopes for a resolution for a while, it now appears that they are giving up on that idea. There have not been any real signs of progress for a while, and I find it hard to believe that China will be willing to strike a deal anytime soon.
The Trump administration did extend its special 90-day license allowing companies to do business with Huawei, but it also added 46 more Huawei affiliates to the U.S. Entity List, a blacklist that restricts U.S. firms from doing business with the Chinese company.
While not directly related to the trade war, it certainly doesn’t bode well for U.S.-China relations.
No matter what the cause, it’s clear we’re still in for more volatility. As a result, I’m recommending a downside insurance trade on the SPDR S&P 500 ETF (NYSEARCA:SPY).
Retesting Support Levels
If we turn to a daily chart of SPY, we can see that last week, it encountered some resistance at its 50-day moving average. SPY is approaching is sitting just below that level now, and if it rises, it may get rejected at that level again.
If it does pull back, the only clear support level established over the last week is in the $282-$284 range. It’s possible that SPY will fall back to older support at $290 or even $288, but right now the clear support is lower. I’m recommending a ratio put credit spread so readers can take an insurance position and collect income at the same time.
Using a spread order, buy to open 1 SPY Sept. 20th $287 put and sell to open 2 SPY Sept. 20th $277 puts for a net credit of about $0.10.
Note: Be sure you are opening the monthly SPY options that expire on Friday, Sept. 20, 2019.
About Ratio Credit Spreads
A ratio put credit spread is a bearish position. It involves writing (selling to open) two options and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account.
This is similar to a ratio debit spread, which is a way to lower the cost of buying options, as the two options that you sell to open (short) help offset the cost of the option that you buy to open. Therefore, this ratio put credit spread is a way to earn a small profit while still establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a ratio spread; contact your broker directly for specific requirements.
Because you are short a naked put in this ratio put credit spread, the risk is that you could be obligated to buy 100 shares of SPY at the $277 strike price for every 1 contract that you are short of the SPY Sept. 20th $277 puts. So, this is inherently a higher risk play.
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