With concerns around inflation growing and tensions ramping up in the Middle East, market uncertainty seems likely to persist. Despite the S&P 500’s recent sharp decline of over 6% from its 2024 highs, I want to protect my returns from further downside while also positioning for future gains.
While we may still be in a bull market, current conditions are challenging, with increasing U.S. Treasury yields signaling potential further actions by the Federal Reserve. Just this week, Atlanta Fed President Raphael Bostic highlighted concerns about persistent high inflation, hinting at possible rate hikes ahead.
Moreover, we’re in the thick of corporate earnings season, with high expectations set against modestly accelerating earnings growth. The spotlight is on Big Tech, and with the S&P 500’s valuation pushing above historical averages, every move in these reports will be critical.
In this trade alert, I’ll share a strategy that has not only protected profits in recent times but also positions us for potential gains, even if the market faces further downturns.
The Trade:
1×2 Put Spread on SPDR S&P 500 ETF Trust (SPY)
- Buy: One SPY put at a strike price of $480, expiring on May 31, 2024. The cost of this put is $4.00.
- Sell: Two SPY puts at a strike price of $450, also expiring on May 31, 2024. Each put is sold for $1.30, totaling a collection of $2.60.
This strategy creates a debit spread costing $1.40 (or $140 per spread), which defines the risk to the downside. Implementing this trade could potentially lead to being assigned a long position in SPY if the price falls below $450.
I am prepared to take a long position at this level, and by selling an additional $450 put, I offset the cost of purchasing the nearer $480 put.
