Trading is about taking risk management and profitability. Most traders learn early on to limit your losses so you can trade another day. The smart educated trader can also use the marketplace to protect their portfolio. Have your exit strategy in place ahead of time, and think of worst case scenarios. I’d rather have insurance and peace of mind, than sticker shock and panic.
The S&P 500 has had an amazing run this year. The index is up over 25% percent from where it started on January 2nd. The year started with the S&P trading near 1426, and has put in new highs 75 times since on its way to the high of 1813.55. Along the way we saw some retracements, the biggest being a 5% move to the downside in June, before returning to its bull run.
We are all aware of the economic conditions of the last five years. Many people have just become comfortable with some financial stability returning to their lives. Investors have had a difficult time finding and getting a good return on their money during the last half decade. The equity markets became an attractive place for a many people to put their investment capital. This year’s move in the S&P looks like a self fulfilling prophecy to me. The index kept moving up as investors kept piling more funds into the market.
Everyone is familiar with the phrase ‘all good things must come to an end.” I’m not calling for an end to the current bull run. As we approach year end, I do think it could have a bit of a pull back. Investors big and small (individuals to fund managers) may start looking to take some profit for the year. A 5% move from the high would put the market near 1723. I don’t think that is coming but we could see something in the 2-3% level, pushing towards the 1765 level.
THE TRADE
I‘m looking at a bear put spread to take advantage of a possible year end sell off. I like buying the January E-Mini S&P 500 1750-1700 put spread at 9 points ($450.00) or better. Since the trade is long premium, risk is limited to the cost of entry plus commissions & fees. The January options will take us into the New Year, so we have the opportunity to be in the market for any action at year end. Maximum profit potential is the difference in the strikes (50 points) minus the cost of entry and commissions. I would place a first exit level target at 20 points. If the market continues to run to the upside, I would look to cut my losses at near 4-5 points.
E-mail Weyer here with any questions.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
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