The summer doldrums appear to have hit stocks, but one trader has a way to play the slow, quiet market.
While the S&P 500-tracking ETF (SPY) has moved into a “June consolidation,” Todd Gordon of TradingAnalysis.com believes that SPY can still break out of its trading range to move higher. But low implied volatility in SPY, an indication of how quiet the market has been, is leading Gordon to be “cautious to pay for options,” since options buyers need to see big moves in order to make money.
As a result, Gordon is looking to sell puts instead. “Even though the market is low volatility, we’re going to sell puts on top of the market,” he explained Monday on CNBC’s “Trading Nation.” “That’s going to create the ability to make money if the market goes up, slightly up and even sideways here.”
To trade the slow SPY rally, Gordon wants to sell the July 244-strike puts and buy the July 241-strike puts for a credit of about $1, or $100 per options contract. This $100 premium becomes the maximum profit Gordon can make on the trade, and he will get to realize it if the SPY closes above $244 on July 21 expiration.
The trade breaks even at $243, and should SPY close below $241 on expiration, Gordon would lose $200.
While the risk reward on the trade is skewed, Gordon is essentially playing for a lack of market movement with a bullish bias.
“Even if the market starts to push higher just a little bit, and even if it just chops higher like it’s starting to do here in the summer, we will be able to collect the decay on those short 244 puts,” Gordon said. “That’s going to work to the advantage of the slow summer months.”
Despite the slowdown in the rally, the S&P 500 has risen 9 percent this year, and closed Monday trading just 0.6 percent from record highs.