A lower cost way to ride the S&P 500 if it keeps rallying to 5,100
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New all-time highs have the market bulls prancing as the first six weeks of 2024 have proven fruitful for those invested. Here’s a lower-cost trade that wins if there’s more upside ahead. The near $8 trillion in cash on the sideline (being hoarded by the bears) remains perplexed as U.S. equity markets focus on a better-than-expected earnings season, continued consumer strength, and cooling inflationary data. Additional inflationary data revised by the U.S. government, lowered its December consumer price index to just a 0.2% increase, down from a 0.3% increase initially reported. Cooling inflation remains a tangible theme for investors globally. SPY 1Y mountain S & P 500 SPDR (SPY), 1 year Another input into why I believe markets will persist higher in 2024 is that the bears continue to growl just about everywhere on Wall Street. Just this week, a bearish note from JPMorgan equity strategists cautioned investors that the upside for global stock markets is now largely capped. This note also stated: “We stick to our view that upside from here appears limited and that equities will fall 20-30% from a 2024 peak.” The short-term view on volatility via the VIX index is in stark contrast to this dire warning from JPMorgan. Of course, the volatility outlook can change on a dime but, the VIX under 13 reveals that option traders are not worried about the S & P 500 any time soon. .VIX 3M mountain CBOE Volatility index, 3 months What to do now that the equity bulls have vaulted the monumental achievement of 5,000 in the S & P 500? Short answer is: Embrace the momentum . The Trade I want to participate in more upside for the S & P 500 anticipating 5,100 to trade before 4,900. I will define my risk as the S & P 500 just popped into overbought territory when viewed through a RSI (Relative Strength Index) perspective. To reduce the cost of simply being long an at-the-money SPDR S & P 500 Trust call, I want to buy a call spread. When buying a call spread, an investor utilizes the sale of the higher priced call to offset (reduce) the cost of the more expensive and lower call. Although selling that upside call potentially limits upside profits, this strategy allows an investor upside exposure at a fraction of the cost in simply buying the underlying stock. Buying a vertical bull call spread: Bought the March regular expiration $500 call for $7.45 Sold the March regular expiration $510 call for $3.15 Net debit to buy one call spread is $4.30 The break-even price for this spread is SPY trading at $504.30. This is calculated by adding the $4.30 (net cost) of the spread to the lower strike price of this call spread, $500. DISCLOSURES: (Long S & P 500 SPDR SPY, Long 480/495 call spread and 500/510 call spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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