The SPDR SPY 500 ETF (NYSEARCA:SPY) certainly had a rip-roaring rally to start off the week. SPY stock rose 1.8% on Monday and finally looks to be putting in a floor at the $430 area.
Implied volatility and interest rates have eased considerably over the past few trading sessions, albeit still somewhat elevated.
Earnings season is off to a solid start. While volatility is likely to remain for some time, the worst of it is likely over. Time to be a buyer of dips on a beaten down SPY.
InvestorPlace contributor David Moadel recently talked about how tech-heavy the SPDR S&P 500 ETF has become. It is a float-adjusted market capitalization weighted ETF.
This means that the bigger the market cap, the bigger the effect on the price of the SPY. The two tech behemoths Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) account for nearly 13% of the overall weighting in the SPY.
Valuations, as Mr Moadel noted, are still not cheap. They are cheaper, however, given the recent pullback in SPY stock. Forward price-to-earning certainly became much more attractive given the big earnings beats by both AAPL and MSFT. Apple exceeded estimates by 11% while Microsoft had an upside surprise of 8.3%.
This puts the forward P/E ratio for SPY at 19.2 which is a marked improvement from the 21.3 forward P/E at the end of 2021. The combination of lower stock prices and better than expected earnings makes for a much more tolerable multiple.
Technical Take
SPY has recovered from deeply oversold readings. 9-day relative strength index (RSI) is back above 30 after reaching the lowest levels of the past year. Moving average convergence divergence (MACD) has also improved considerably after printing at yearly lows as well. Bollinger Percent B is firmly back in positive territory once again. Momentum turned sharply higher. SPY stock also has begun to move back up towards the 20-day moving average. Shares once gain held the major support level at $429.
Source: The thinkorswim® platform from TD Ameritrade
The previous times all these indicators were aligned in a similar fashion marked significant short-term lows in the SPDR SPY 500 ETF (highlighted in the chart). It is an even more powerful technical indicator given that it took place at a major support area following a deep and prolonged pullback.
Implied volatility (IV) has fallen from the recent extremes but is still comparatively elevated. The volatility index (VIX) measures 30-day implied volatility for the S&P 500. The normal regime of volatility over the past year has been between 16 and 22.
The last four times the VIX spiked above 22 in a significant manner it inevitably pulled back to trade back down towards the 16 level. Notice how the last four spikes also coincided precisely with the lows in the SPY. The VIX is can be insightful when used as a market timing tool at extremes.
Source: The thinkorswim® platform from TD Ameritrade
So rather than go long the SPY at current levels, I prefer to sell out-of-the money puts to position to be a buyer of SPY stock at lower levels. Certainly a further 3-5% pullback in SPY stock wouldn’t be unexpected given the recent tumultuous price action. Selling puts also takes advantage of the still elevated option prices. You get paid now for the obligation to be a buyer at lower levels on the SPY.
How To Trade SPY Stock Now
Sell SPY June $425 puts at $15.00
Maximum gain on each put sold is the premium received of $1500. Selling the put obligates the seller to buy SPY stock at the strike price of $425. Breakeven on the trade is $410 on SPY ($425 strike less $15 initial premium received) which provides a 8.87% downside cushion to the $449.91 closing price for SPY stock.
Investors and traders looking to take advantage of lower stock prices and higher option prices may want to consider selling puts to get paid now to be a buyer later and lower.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.
