arrow-left arrow-right brightness-2 chevron-left chevron-right circle-half-full facebook-box facebook loader magnify menu-down rss-box star twitter-box twitter white-balance-sunny window-close
Shorting SPY as a hedge or outright - Long Put Spreads / Short Call Spreads
3 min read

Shorting SPY as a hedge or outright - Long Put Spreads / Short Call Spreads

Shorting SPY as a hedge or outright -  Long Put Spreads / Short Call Spreads


Over the past several weeks, as markets saw one big down day and lots of days drifting higher we've looked at some of the broader market ETFs and detailed some multi leg strategies for short exposure in QQQ (read here) and IWM (read here), and following the recent large one day drop a neutral/short vol stance in SPY (read here).

With bad coronavirus headlines spooking the market today (or at least causing some profit taking) I wanted to check back in on SPY and look at some short exposure trades for those looking either outright or as a portfolio hedge.

The Set-Up

We all know the story by now with many large cap stocks making new highs, even powering tech heavy Nasdaq Comp to new highs. The S&P 500 has made an impressive run, but it has not recaptured its pre Covid highs. I want to look at two ways to get short exposure, one is a consensus view of a pullback in line with how options are currently pricing a move lower, the other fading any move higher from here while also being short vol with an elevated VIX.

Let's start with the 3 month expected move chart, from Options AI technology

That's a very realistic range out to September and it wouldn't shock me to see SPY somewhere inside that range when it's all said and done. It's easy to envision a push and pull between bad covid/economic headlines and time advancing closer to a vaccine. However, it's also very realistic for a selloff to start forming now that we've gone from the "re-opening" euphoria to the "maybe that was too fast" mood swing. So for those looking for some short exposure for the next few months a consensus bearish trade structure makes sense. From OptionsAI:

The Long Aug 305/281 Put Spread:

This put spread breaks even at 298 in the SPY and makes money all the way til its cap below 281. It's decent risk reward and doesn't have to go down too much for it to be profitable. 281 is a very realistic pullback level in SPY. As you can see it is ALOT cheaper than the 305 put outright, at about half the cost. I'm not sure the protection below 281 is worth the extra money, there are better ways to play for a disaster.

Now for the Short Aug 305/329 call spread:

This is close to 1/1 risk reward with a high probability of profit due to the breakeven near 316 in the stock. However, it's a lot of time to wait, especially if the market heads towards new highs over the Summer. BUT, it is selling pretty high vol (the VIX is 36 today). If the market began to march higher into August vol would likely be in the 20's helping this trade even as its deltas hurt. And on the flipside, if it was right directionally and the market went lower, it began at a high vol and won't get hurt too bad on a vol spike from here. Its short deltas will be way more profitable than any spike in vol.

See a small part of OptionsAI technology with your own price target and demo trades in AAPL HERE


Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

Broker Dealer (FINRA Registered)

Built for one-tap spread trading
No chains. No per contract fees.
Powered by OptionsAI technology (Patent Pending)