After being relentlessly beaten for two weeks, the bulls have finally received a desperately needed respite from the pain. Investors are no doubt wondering whether it’s safe to jump back in the water. Given the severity of the crash, as well as the numerous support levels which have been breached, the bulls certainly have an uphill battle. Rather than seeing a sharp “V” reversal right back into an uptrend, I suspect this market rally is merely a “dead-cat bounce” soon to be resolved to the downside.

Option traders seeking to exploit another leg lower in the market have a variety of bearish strategies to choose from. Those looking for higher-probability bets may consider selling out-of-the-money bear call spreads. For those otherwise unfamiliar with this strategy, a brief review is in order: The bear call spread, also referred to as a short vertical spread, consists of selling a lower-strike call option and buying a higher-strike call option in the same expiration month. The trade is entered at a net credit which represents the max reward.

The maximum risk is the distance between the strike prices minus the net credit. Typically shorter-term options are used to exploit the higher rate of time decay.

With the SPDR S&P 500 (NYSE:SPY) exchange-traded fund sitting around $120, traders seeking bearish exposure may consider selling out-of-the-money September call spreads. The strike prices selected will depend on the aggressiveness of the trader. One trade I currently like is the September 128-133 call spread that is offering a credit of $62, which represents a potential 14% return. In timing the trade, I suggest waiting until the market rally shows signs of rolling over.

Source: MachTrader

At the time of this writing Tyler Craig had no positions on SPY.