Everyone loves a bull market. I suppose there are some that do not, but generally speaking people tend to be happy when things go up, particularly their portfolios. Since 2009 investors in all forms have seen unprecedented growth in the equity markets. At times it seemed as if the the stock market was the only place for consistent return on capital. The economy has recovered and caught a bit since 2009, but talk of hourly wages and percentage of under-employed don’t grab attention like “did you see what the Dow did today?”
After being involved in the financial industry for the last few decades, I tend to think about events like “new all time high” as opportunities. As we plod through the last days of summer, and head into September I wonder where this market will go next. My gut tells me we will see a few more all time highs before the month is over. That same bigger than it used to be gut has me thinking about putting something in play in case the market wants to take a break from its upward trajectory.
With a retracement in mind, I am looking to put on a bearish trade, and define risk at the same time. The simplest way for me to do that is a bear put spread in the E-Mini S&P 500. The September options expire on 9/21, which gives this trade 25 days for a move . I like buying the September E-Mini S&P 2820 put and selling the September 2720 put at 6 points ($300.00) or better. We are long premium in this trade, so risk is defined to the cost of entry (premium +fees + commissions). The value of the spread is 100 points ($5000.00) and would be hit if both strikes are in the money at expiration. When putting on trades like this I generally don’t try and get full value, but set a target exit that seems attainable. In the case of this trade, my initial target is at 20 points from entry. If the S&P decides to keep chugging along to the upside, and it looks like the trade is not going to work, I would try to get out for 3 point ($150.00) loss.
The 2820 level is where our most recent push to the upside started in mid-August. A 3% pullback from current levels (2899 as I write this) puts that strike at the money, and a 6% move will have the spread in the money.
Feel free to contact me if you have any questions about this trade or the markets in general.
John Weyer
Director Commercial Hedging
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