Date: 5/3/2022
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Just a couple of weeks ago, I was quite bullish on the market.
Now I’m not.
The market doesn’t care about my opinion any more than yours. So when the signals indicated that the trend on SPY shifted from bull to bear, I started playing short.
Holding on to any directional bias despite the technical signals is financial suicide.
There are currently very few long options trades in my book.
You win much more often when you don’t try to buck the trend.
It reminds me of the words of American philosopher Werner Erhard:
“Ride the horse in the direction it’s going.”
In uptrending bull markets, my key strategies include long calls, bull call spreads, and bull put credit spreads.
These profit on a rising ticker – they’re a bull’s best friend.
However, when the trend shifts, so must your trade types. So let’s look at how to play the market to the short side.
Former CIA operative secures a 500% win for his readers in just 30 days.
Catch the next potential 5X or 10X breakout with Dr. Kent Moors’ elite market research. Don’t miss the latest updates to the $40 Trillion market mega-trend of the decade.
Click the link right here to get the full details.
First, there are long puts.
Just as calls profit when a stock price rises, puts gain value as it falls. So just as with calls, you can buy ITM, ATM, or OTM puts to take advantage of the downturn.
If you have a large account, buying puts is a reasonable strategy.
Let’s assume (as I do) that in the near term, SPY is going to see quite a bit more downside before we can hope for a rebound.
Just fork over your $2,476 for the Jun 15, 2022, 425 strike put, and you’ll likely make some cash over the next couple of weeks.
But if you’re keeping with your 1-3% position sizing rules, that might be a bit cost-prohibitive.
So you could also do a bear put debit spread to gain short exposure.
This is essentially the reverse of the bull call debit spread. So, for example, I might buy the SPY Jun 15, 2022, 425 strike and sell the 425 for the same expiration.
At $953.00, it’s a much cheaper trade.
Of course, I’ve limited my max profits here, but risking 953 dollars for a potential $1347.00 gain is an excellent deal.
However, if that’s still too rich for your blood, just buy calls on the inverse index ETFs.
Most are not only much less expensive but give you 2-3x the leverage on a downside move on the associated ticker.
If I think SPY is a sinking ship, then my favorite is SPXS. This ETF is a triple-leveraged short on the index, and it’s much less expensive.
Less risk with more potential return?
Count me in.
Compared to the price of the put, or even the bear put spread, an SPXS Jun 15, 2022 call at the 21 strike only costs $370.00 per contract.
You can find a leveraged bearish ETF for most key indexes to suit your needs.
Think the technology sector is dropping? Then, consider calls on QLD, SQQQ, or PSQ.
Lower price, more bearish exposure, and all-around a better deal.
A couple more of my favorites are LABD for shorting biotech and SOXS as a bearish play on semiconductors.
Just a word of caution.
These tickers were meant for trading, not investing. Holding them in your account long-term is like collecting toxic waste.
They lose value over the long term, turning your account into an irradiated, profit-eating monster.
Finally, there is the bear call spread.
Selling a credit spread above the stock price just as you would a bull put spread below it.
For instance, at the time this writing, I can sell a SPY call spread by selling the May 18 2022, 415 strike, and buying the 415.
I get the same sort of theta decay over time as with a bull put spread, and the faster the ticker drops, the quicker I can close the trade.
The problem with selling credit spreads in a strongly bearish run is that you get much premium.
To get paid the most, short the rallies in the downtrend.
As the stock is still moving up, take advantage of the increased call price to place the trade.
Currently, the premium on SPY is reasonable. We just had a bit of a pop in the stock price. I could sell that SPY May 18 spread I mentioned is paying $57.00 for a max loss of $43.00.
I like that risk-reward ratio.
These are just a few ideas to play with. I just caution you that reversals can happen suddenly, so carefully manage your exits.
Cheers,
Chris Hood
PS – Congrats to my colleagues at Rogue Investing Daily for their recent win on WEAT of 48.71%. Inflation is here and doesn’t appear to be slowing down. They saw the opportunity to profit from the commodity run as well. Find out what they’re looking at now by clicking right here.
