Published On: Tue, Apr 25th, 2017

Getting into the S&P 500 with a bull call spread

InstaForex

Medium term

/

Buy

Trade view / 10 minutes ago

Product Manager Futures and Options / Saxo Bank

Denmark

Price target:242

Market price:238.17

Background


Despite analysts’ persistent worries over such things as lower-than expected US fourth-quarter GDP growth of 2.1%, lowered corporate earnings forecasts, rising interest rates and so forth, the equity market might be prompted to extend its 5.5% year-to-date gains.

Yesterday, the S&P 500 exchange-traded fund (SPY) cleared its 30-day moving average on above-average volume and might be breaking out of a bull flag. The flag itself has taken some two months to complete, which could suggests further gains in the index. 

Source: Saxo Bank

The bull flag had a pole with a base of $ 228 and a top of $ 240.32 from March 1. The rally could be in the works for a repeat over the next couple of months. This is why we are approaching this trade as a short-term opportunity, using options on the ETF (SPY).

Management and risk description

The risk in the trade is contained within the 5-point wide spread. If both legs expire in the money, the client will buy shares at $ 237 and sell them at $ 242, and could incur additional commissions and fees. Make sure you close the trade before expiration and avoid going through assignment. We will provide updates on the trade.

Parameters

Underlying: $ 238.15

Status: opening trade

Trade: Buy +1 vertical SPY 100 16 June 17 237/242 call at $ 2.63 or $ 263

Breakeven at expiration: $ 239.63

Maximum loss at expiration: debit paid ($ 2.63)

Maximum gain at expiration: ($ 5 – $ 2.63) or $ 2.37

* The above numbers are indicative and do not include commissions.

Entry: today as a combination order 

Stop: no stop; the above trade takes 1% of capital from account value

Target: $ 242 or above

Time horizon: 1-2 months

— Edited by John Acher

Non-independent investment research disclaimer applies. Read more
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