Low Risk S&P 500 April Expiration Option Trade

Market Summary

Stock prices across the board continue to climb higher as more buyers are coming off the sidelines and bidding up prices. As confirmed in the daily SPY chart directly below, most of the major stock indexes have exceeded their multi-year highs from last summer. Stocks may be taking a breather and consolidating gains generated over the past month or so. This is generally considered a bullish sign as stock prices usually continue in the direction of the trend after consolidating.

Investor Analysis

It looks likely that stock prices should push higher in the near term. Looking at the SPY daily chart above will confirm that since the beginning of the year, stocks have 'bulled' higher with nary a pause. Prices have consolidated a bit over the past few weeks, but from a technical perspective this should be considered bullish. Price consolidation usually helps alleviate overbought or oversold conditions, and prices are usually expected to move in the direction of the current trend after the consolidation ends.

Possible Strategy

The February 27^th Investor Report said "... As the bullish move continues, some investors are considering debit spread strategies to profit from the S&P 500's possible move higher. For example, trading a SPY March option expiration long 136, short 139 debit spread would cost $1.60 per share (based on yesterday's close – buy the 136 @2.40 and sell the 139 for .80), but would generate $1.40 profit if the SPY rose above $139 prior to March 16^th (calculated as 134 minus 131 = $3.00 credit, less the $1.60 debit to buy the spread) " As expected, stock prices moved higher and the value of suggested option trade increased to the maximum profit prior to the March expiration. Investors can take advantage of the continued bullish trend with a similar trade for April, for example trading a SPY ETF April option expiration long $143 strike price call/short $140 strike call debit spread would cost $1.44 per share (based on yesterday's close – buy the $140@2.27 and sell the $143@ .83), but would generate $1.56 per share profit if the SPY rose above $143 prior to April 20^th (calculated as $143 minus $140 = $3.00 credit, less the $1.44debit to buy the spread) For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/option-basics/

By Gregory Clay