New Trade $SPY – #ForeverUp

by Dan January 24, 2013 1:49 pm • Commentary

So the SPX finally breached the 1500 level this morning, a rare feat for the index over the last 15 years.  The debate has heated up in the last week as we’ve neared this level.  Is this finally the secular bull market that we’ve been waiting for?  

Funny that everyone now seems to be falling over each other to talk about the onset of the new bull market, when the market has already rallied 12.5% since mid-November.  Probably not the best trading decision to get involved on the long side only after prices are already much higher.  But that’s the nature of human emotion in trading.

Meanwhile, earnings season hasn’t exactly been a blockbuster.  Sure, we’ve seen some decent beats, but some of the largest global companies (AAPL of course, but also, INTC, JNJ, and UNP have not been overly optimistic for 2013) have not signaled robust demand.  Add to that the CotD Enis just posted, which shows the weak trend in recent macro data, and the market feels vulnerable to a quick pullback.

Finally, we’ve gotten a lot of questions about buying VIX calls as a way to play an increase in volatility on a pullback.  Instead of that, we’d rather just take advantage of the cheap options and buy SPY puts, which is a direct bet on a lower market (rather than worrying about VIX roll, VIX vol, and other complicating issues):

TRADE: SPY ($149.05) Bought the Feb16th 149.00 Put for $1.60

-Bought 1 Feb16th 149 Put for $1.60

Break-Even on Feb16th Expiration:

-Profits below 147.40

-Losses up to 1.60 btwn 147.40 and 149, max loss of 1.60 at 149 or higher

Trade Rationale: Implied vol on this line is down to 11, so I only need a slightly more than 1% down move from here to break even on the intrinsic value of the option, so I’m not paying much at all for the time value.  I’ll probably look to spread or take off the trade on the first meaningful selloff in SPY.