After a stuttering start to 2024, the S & P 500 has found its way into positive territory and the benchmark seems poised to establish a new all-time close Friday, surpassing the 4,800 level which served as resistance back in January of 2022. We’ll review an options trade for investors who want a low-cost way to participate in the bull market, but still have their doubts about whether this rally can keep going through 2024. Markets continue to wrestle with not “if” but, “when” will the Federal Reserve begin to start slashing interest rates. My optimism on U.S. equities is predicated on the continued strength of the U.S. consumer and our economy but, I believe the real reason for the S & P 500 to possibly run up and kiss 5,000 is because of the underinvested bears. I want to use options to express a bullish view in the SPDR S & P 500 ETF (SPY) yet more importantly, buying a call spread allows me to define my risk in the event this breakout is not sustained. SPY 5Y mountain SPDR S & P 500 (SPY), 5 years Investors will remain focused on continuous Fed messaging specific to the timing of the rate cuts in the wake of the Fed’s telegraphed pivot from being hawkish to dovish in the fourth quarter. Markets have also seen a catalyst in technology stocks, specifically semiconductors. Taiwan Semiconductor (one of the largest chipmakers globally), boosted their outlook for tech earnings with its better-than-expected earnings report. They also issued a robust full-year sales and earnings guidance, fortifying the semiconductor market recovery and continued artificial intelligence investment theme. (Until 2024, TSM has been a laggard to the broader semiconductor market represented via SOXX.) The trade: To reduce the cost of simply being long an at-the-money SPY 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 February regular expiration 480 call for $5.75 Sold the February regular expiration 495 call for $0.85 Net debit to buy one call spread is $4.90 The breakeven price for this spread is SPY trading at $484.90. This is calculated by adding the $4.90 (net cost) of the spread to the lower strike price of this call spread, 480. DISCLOSURES: (Long SPY and long this 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.
