I like to use SPY calls to buy such a breakout, with a just-in-the-money call, say the 273, expiring in about 4 weeks. If the index makes it to 2815, the SPY would sell at about 281, and the SPY 273 call would be around $8. The closing price of the December 28 call on Thursday was 5.76. That’s too expensive. I don’t like the potential there. It’s not a trade I’d make.
Besides, as of now, there’s no breakout. It’s only something to watch. On the other hand, there’s a put trade that could work now. With the SPX just below resistance at 2754, we could be a 275 put expiring at the end of December, looking for a move to the bottom of the triangle at roughly 2640. To limit risk, we could have a mental stop just above the resistance area of 2754. We could have a stop at say, 2760, or 276 on the SPY, with the target being 264 for closing out a profitable trade.
The 275 December 31 SPY put closed at 5.94 on Thursday. At SPY 264, it would trade for around 11. That’s almost a double, and with the thin range, it could happen fast. It’s certainly a trade I’d consider. And if the triangle breaks down, as I suspect it will, that could lead to another trade, potentially just as profitable or more.
However, if by the time we look at this on Monday morning the market has already fallen materially away from the resistance level of 2754, I’d take a pass.
As time goes on, I’ll be on the lookout for more low risk, high potential reward bear setups. Meanwhile, you can trade the market both ways, regardless of whether it’s a bull or bear market. Tom Gentile’s ingenious Money Calendar research service doesn’t care what direction the market is headed. It has identified seasonal patterns that pinpoint profitable trade opportunities over and over. Click here for info on Tom’s service.