Stock Weakness Continues, But For Contrarians In The E-mini S&P and SPY, Options Exist

Since the E-mini S&P hit its recent high of 2105.25, the stock market, as represented by the broad based S&P 500, has seen an approximately 3% point correction. Bullish consensus has fallen and the market has clearly wavered. As always, the question is what’s next? For those that believe that the market will regain its footing and move back up to the levels seen just two weeks ago, the E-mini S&P Options provide an opportunity to participate in that move while at the same time exposing themselves to substantial exposure should the market fall approximately 12% between now and June 17th, the expiration date of June Options.     

While Selling Puts naked, which part of this Options Trading Strategy requires, is not usually number one on my list of chosen strategies, if you’re looking for an opportunity to get Long Stocks, with a good risk/reward ratio, then Buying the 2150 Calls and Selling the 1800 Puts for a Credit is a trade that is worthy of consideration. The Table below provides all of the details, but this Long Fence gives you room to be wrong. Futures Contracts such as the E-mini S&P are highly leveraged contracts and the 1800 Put requires the Seller to potentially be responsible for purchasing $90,000 worth of Stock. The value is calculated by multiplying $50 times the Strike Price of 1800 and represents the structure of the E-mini S&P contract. An alternative would be to consider SPY (SPDR S&P 500 ETF) which is a smaller contract with similar features.

The Strategy involves Buying the 2150 Calls for 2.85 (the midpoint of the Bid/Ask) and Selling the 1800 Put for 3.85. This would provide a credit of $50 or one E-mini S&P point. The Calls are 106.25 away from the trading price of the underlying while the 1800 Puts are 243.75 away. The percentage, as shown in the Table is 5.20% for the Calls and 11.93% for the Puts. The differential is immense, but not uncommon as people are willing to pay a significant premium for out-of-the money Put protection. If you are unclear on this take a look at Options Strategy Network for many useful educational tools. It should clarify a multitude of your Options Trading questions.

The Table shows how the Implied Volatility of the Options gets greater the farther out-of-the money the Put is. Evaluating the Skew is extremely helpful in finding Options Trading Strategies that meet your risk/reward requirements. There is a multitude to choose from, but if you’d like to get Long with a big cushion for error, this may be an interesting trade. For those with significant cash reserves waiting for lower Stock Prices before broadening their exposure to equities, this can be very useful. AAPL (Apple Inc.) AMZN (Amazon.Com Inc.) and GOOGL (Alphabet Class A Inc.) all have a similar Implied Volatility Skew Structure, unfortunately not to the same magnitude as the E-Minis and SPY. Surprisingly, there is an Options Trading Strategy which provides excellent value to get Short the E-Mini S&P using the Implied Volatility Skew. In addition, it can be structured with limited risk. Choosing the correct strategy based on your market bias and evaluating the dynamics of the market can be quite beneficial when Trading Options. This PowerPoint Presentation should help with the details.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.

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