Equities have recovered nicely from the Feb lows, now what?

Equities have had a nice run since mid-February, the SPX has gained 13% since the February lows.  So, what should investors do to have some skin in the game at these heightened levels?

Using options there are several strategies at play:

  1. Stick to high quality names & let option flow be your guide for where institutions are investing their cash.  Over the last week we have seen large option prints in longer dated call options, including KO, KHC, PCG, NWL, and AAL
  2. Sell near month calls against your longer dated call positions.
  3. Use pair trades.  Going long one sector vs shorting another is a strategy that may work well in lower volatility environments.  Note the VIX is now back below 15. 

One particular pair trade I like now is Value (VTV) vs Growth (VUG).  Looking at the chart below indicates that VTV vs VUG has recently broken a multi-year trend line.  Here is an option trade to take advantage of further outperformance:

-          Buy the VTV (Vanguard Value ETF) Aug 83-88 call spread @ $1.70.

-          Buy the VUG (Vanguard Growth ETF) Jun 104-99 put spread @ $1.30.

Note due to the option prices in these contracts being fairly wide it may be more optimal to trade this long vs short stock.

VTV vs VUG – 4 year chart

VTV_VUG.png

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