Hopes of a present-filled December are being dashed before our very eyes. Jitters ahead of this month’s Federal Open Market Committee meeting have ushered in a chop-fest in the S&P 500 reminiscent of the post-China crash fallout in August.
For a month that’s one of the least volatile of the year, December isn’t exactly living up to its reputation, at least so far. But hey, the bulls still have time and Santa on their side, so let’s not be too hasty in writing them off so early in the month.
One of the best strategies to consider in an environment such as this is the bear call spread. And if you’re not in the stock picking mood, you can simply use the SPDR S&P 500 ETF Trust (SPY).
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The market’s indecision is easily seen in the accompanying chart of SPY.
The past month has been dominated by the flip-flop. Up days are followed by down days, and vice versa.
For a directional trader it doesn’t get much more frustrating than this, but that’s why non-directional plays like bear call spreads are so attractive. You can profit from the passage of time while the SPY ETF dithers.
SPY Bear Call Spreads for the Win
The bear call spread consists of selling a lower strike call and buying a higher strike call in the same expiration month. Upon entry traders are paid a net credit which represents the max reward that will be captured if both call options expire out-of-the-money.
Sell the Jan $214/$219 call spread for 50 cents. The max reward is limited to the initial 50 cents, and will be captured if the S&P 500 ETF remains below $214 for the next month. The max risk is limited to the distance between strikes minus the net credit, or $4.50, and will be lost if SPY powers above $219 by expiration.
To limit the loss, consider exiting if the SPY ETF rises above the short call strike at $214.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
