Stronger Economic Data Can't Keep the Price of SPY Up
By:Tom Preston
Despite economic data showing the rate of inflation slowing and manufacturing activity increasing, the S&P 500 wasn’t feeling the love. SPY, the exchange-traded fund (ETF) that tracks the S&P 500, closed lower for the second day in a row after hitting an all-time high last Thursday morning.
A spike in long-term rates and higher oil prices didn’t help, but what might be most concerning for market bulls is yesterday’s rise in the volatility index (VIX). The low VIX signals market complacency, and the gap up in the VIX indicates the SPY might hit panic mode with any sign of weakness.
That might be enough for a contrarian trader to consider a bearish strategy in SPY. Despite the jump in the VIX, SPY’s IV is still low, and its 14% overall IV and 15% IV rank point to debit spreads for speculative strategies.
If you think SPY might drop in the next few weeks, the long put vertical that’s short the 522 put and long the 524 put in the May expiration with 45 days to expiration (DTE) is a bearish strategy that has a 69% probability of making 50% of its max potential profit before expiry, and that generates $.28 of positive daily theta.
Tom Preston, tastylive chief market strategist, is responsible for the brokerage’s trading strategy, client-facing trading software and futures trading products. He contributes to Luckbox magazine and writes tastylive's Cherry Bomb newsletter. He's been trading options since 1992.
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