The broader market is in an uptrend as those higher highs and higher lows of the past two months in the SP-500 (SPY) are a classic rendering of what one looks like. Of course, the classic constructive action comes despite many of those same technical incidents being carved out compliments of bulls and bears minding more than a few gaps along the way.
Below in Figure 1, a daily chart of the SP-500’s ETF shows the uptrend still in motion. Also in the picture, we’ve annotated key intermediate resistance which is looming overhead which consists of the round and formidable 1400 level to April’s highs of 1422. With that challenge not too far off, what’s a bull or a bear to do? One position idea which might be worth consideration is a long put calendar.
Figure 1: SP-500 (SPY) Daily Chart
With implieds ($VIX) near three month and multi-year lows, fairly-valued compared to statistical volatility and the historically rough and tumble September / October period not that far off; a long put calendar positioned slightly out-of-the-money can allow a bear or a bull looking for some protection in the near future to potentially bide their time more effectively with some theta collection before considering the naked hold of a more overtly bearish long put position.
Using Friday’s close to illustrate this type of time or calendar spread, the 136 level is less than 3% away and represents the top layer of a key potential support zone from 135 – 136. If broken, it could be yet another situation of investors minding the gap and not looking back for a long while. That said, with single point strikes in the SPY, ultra-tight markets and even “Weeklys” and “Quarterlys” contracts to consider, a trader could construct a position such as the October / September 136 put time spread to start for just more than $1.00.
Figure 1: SP-500 (SPY) 4x October / September 136 Put Calendar
Above, we’ve put together a hypothetical four lot calendar which amounts to 2% risk on a $20K portfolio. If market prices remain above 136 into September expiration, the trader could have a long October put for an extra 28 calendar days or even look at rolling a fresh short into one of those non-regular, nearer-term contracts. What we don't know is how the trader’s effective entry price of $1.00 on the October 136 put would stack up versus actual market prices. That of course is going to be dependent on where the SPY and implied volatilities are. However, with some theta collection, a decent spot to pick up some vega and given the current and historical technical trends of the market, it may be a decent time to mind one or more of those gaps with a calendar.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.