2023 is off to a big start as the S&P 500 is higher by 15% on the year, while the Nasdaq and Dow are up 30% and 3.5% respectively. So now the question becomes, as spring turns to summer, where do the indexes go from here?
If I were a betting man, I say the indexes will continue to make new highs, which presents an opportunity to go long calls with upside potential.
To paraphrase some recent statistics shared by @RyanDetrick on Twitter:
S&P 500 was up >15% year to date during the first half of 2023.
Previous occasions when this happened: full-year higher 10 out of 10 times.
Average gain 23.8%.
The worst return in the past seven times was 26.3% in 1991.
In other words, this isn’t bearish.
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Pretty impressive! So, if I was looking to get bullish exposure to the market continuing higher for the rest of the year, I might look to go long (buy) an at-the-money call option that has several months until it expires. Something like:
Buy to Open the S&P 500 ETF (SPY) January 440 Calls (exp. 1/19/2024) for $25.
The upside in this trade is unlimited as the long call option would explode in value should the index continue to run higher.
The downside to this trade is limited to the premium paid. This means if I bought one of these January 440 calls for $25, the most I can possibly lose is $2,500 (1 call represents 100 shares of stock, which means the $25 price is actually $2,500).
Conversely, if I wanted to bet against the market and these impressive historical gains, I might look to buy a put option to protect against the downside. And the good news for put buyers is the VIX, which is a measure of fear in the market and affects the price of options, is at a multi-year low. Essentially insurance against a market decline is very cheap historically.
With that in mind, if I wanted to bet against the S&P 500, I might look to:
Buy to Open the SPY January 440 Puts (exp. 1/19/2024) for $17.
And should the SPY pull back these put options would almost immediately gain in value, with the potential to be worth dramatically more if the S&P 500 were to fall 5/10/15% or more, and would really explode in value if the indexes again tested their covid lows (or worse).
Somewhat similarly, we could look to execute bullish and bearish trades on the Nasdaq (QQQ) and the Russell 2000 (IWM). Here are some ideas, again targeting long, at-the-money calls/puts expiring in January of 2024.
Long Call and Put Opportunities in QQQ and IWM
Bullish - Buy the Nasdaq (QQQ) January 370 Calls for $27
Bearish - Buy the Nasdaq (QQQ) January 365 Puts for $20
Bullish - Buy the Russell 2000 (IWM) January 185 Calls for $14
Bearish - Buy the Russell 2000 (IWM) January 185 Puts for $10
As I noted at the top, I think odds favor the market continuing to tack on gains later this year. In fact, Cabot Options Traders own several bullish positions in stocks such as Shopify (SHOP), Uber (UBER) and more. That being said, my eye is always on risk, and because of that we also recently bought a hedge, which will protect those bullish positions should the second half of 2023 be unkind to investors.
It’s going to be interesting, as always!
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