The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) continues to rally unabated. SPY just made its seventh consecutive new all-time high and has been up for eight days in a row. All is seemingly good in the world … perhaps a little too good. Complacency, along with valuation, has reached an extreme. My trader gut is telling me it is time to take a contrarian short position.

Click to Enlarge The S&P 500 keeps climbing and is at the most overbought level in the past year. Nine-day RSI is over 85, a reading which has signaled significant tops in the past. The eight- day winning steak is the longest since 2013. Things are definitely getting overheated in SPY from a technical perspective.

While valuations continue to be ignored, especially in this low-interest-rate environment, the fact remains that valuations do ultimately matter.

Instead of looking at price-to-earnings ratios, which can be manipulated by stock buybacks and accounting tricks, I like to focus on the cleaner price to sales (P/S) metric.

Click to Enlarge The P/S ratio on the S&P 500 is now at the highest level in the past 15 years, measuring 2.18. The mean and median  levels are usually around 1.45, so price to sales is now an incredible 50% higher than the norm. SPY is most assuredly at frothy valuations.

Perhaps most importantly, the CBOE Volatility Index just made an all-time low, closing at 9.24. The record low levels in the VIX are certainly a sign of complacency and a contrarian sell signal.

Since the VIX is a measure of implied volatility (IV) for the S&P 500 (and IV is just a measure of option prices) , record lows mean that option prices have never been cheaper.

So with SPY way overbought and richly valued, using the cheapest options ever seems like an ideal way to position for a counter trend pullback in the SPY.

SPY ETF Trade Idea

Buy SPY Oct $255 puts at $1.35.

These are the at-the-money puts and are trading under a 5.5 IV level. With SPY closing at $254.65, it means that it would just a 0.4% pullback over the coming two weeks for these puts to break even. A mere 1% pullback would result in at least a 113% gain.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.