Santa's sleigh has left Wall Street for the first time in about 10 years (2015-2016). The “Santa Claus Rally” refers to the tendency of the S&P 500 to rise during the last five trading days of the calendar year and the first two trading sessions of the new year. As New Year's anxiety crept into the market, this year's Santa Claus gathering unfortunately ended in the same red as Santa's suit. Last year, the naysayers and market bears were destroyed when the S&P 500 ETF posted better-than-expected returns in 2023 after the midterm elections. However, the 10-year bond yield has recently risen again above 4%, and benchmark stock indexes are looking a little nervous as 2024 begins. My bullish view is that while the recent 2% decline in the S&P 500 reveals an opportunity, it also signals signs of an even more significant decline. With the recent increase in volatility, the CBOE Volatility Index has increased significantly since the beginning of the year, and the associated increase in option premiums means investors will receive more reward for their risk. is showing. I also believe that market participants who have held on to the upward trajectory of stock prices in recent months will benefit from the fact that they still have a lot of cash on hand. .VIX 6M Mountain CBOE Volatility Index, 6 Months My final take on this bullish view is to look at the chart of the S&P 500 ETF (SPY). As you can see below, the S&P 500 is indeed above its 50-day and 200-day moving averages, but the RSI level is far from overbought with a reading of just 53. Above 70 typically indicates overbought territory, while below 30 indicates oversold. This area is important if you want to utilize RSI (Relative Strength Index) with either ETFs or stocks. If you agree that the stock market will perform well in the first month of January 2024, the following bullish risk reversals should help you capture short-term upside. This zero-cost spread can be established by selling an at-the-money put and using the premium collected in writing on that put option to buy an upward out-of-the-money call at approximately the same price. The same expiration date is used for both put and call options. S&P500 (SPY) Risk Reversal: Sold a regular expiration January OTM $460 put for $1.40. Bought a regular expiration January $475 call for $1.40. By selling a put and buying a call, the cost of this bullishness becomes zero. This SPY risk reversal strategy involves buying out-of-the-money calls and selling at-the-money puts. We want SPY to go beyond long phone strikes as much as possible. There is infinite upside potential for profit, but also infinite downside risk. This risk reversal is used as an aggressive bullish trade. Because I finance the premium paid by buying a call option with a higher strike price and selling a put option at the money, I am effectively making a bullish trade at no cost. Become. If I'm right, if SPY continues to rise, the short put will become worthless and the long call will increase in value, creating a sizable profit. However, if I am wrong in my belief that the market is making new S&P 500 all-time highs, I would be forced to buy SPY at the short strike price minus the premium collected. In this case, you would own SPY for $460 since you didn't recover anything on the spread/risk reversal. This strategy is considered risky and can result in significant losses, so all short puts should be covered with cash. Even if you are forced to buy SPY at a lower price, you will still get a better result than simply buying this ETF at $460. Disclosure: (Kilberg is the owner of this spread and has been a spy for a long time) The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
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