There are few things in life that have been less fruitfull than trying to short the US Stock Markets over the past few years. Algos, Central Banks, the PPT... whoever it's been.. there has been a unambiguous and persistent bid under this market. It has turned into a run away freight train that has been relentlessly mowing down shorts and powering to new highs every other week. But there are very visible clouds on the horizon and after a non stop sprint the first 7months of the year, we believe there will at least be one of these 150-200 pt sell-offs coming. Despite the overwhelmingly bullish technicals, we simply can't help ourselves and want to play the top calling game.
In trying to find a chink in it's armor, we have noticed over the past 3+ years that whenever there is a sell-off, it happens swiftly and in the back half of the year. There hasn't been much meat on those bones, so you have to be in if you want to get a piece. With Central Banks tightening globally, and US tax cuts all but dead in the water, we believe there will be some harvesting of the sizeable 2017 profits.
To aid our efforts, It appears selling Vol is the flavor of the day, which has resulted in Implied Vol on S&P options of 10 or below. So we simply can't help ourselves and will have to take the other side of that bet. Here is how to play it.
Short Dec S&P Futures at 2463.
Buy the Dec 2465 Calls for 65
Sell the Dec 2300 Puts for 28.
The net cost of this hedge is $37, while we have profit potential of 163 points minus the hedge cost = 126
This gets you a R/R profile of 3.4 - 1 and you have 145 days for this to work, and let the annual selloff pattern play out..
In the event the freight train continues rolling the next 4 months, simply execute the same trade at the end of this one.. When you play with a 3-1 + RR profile, you can be wrong multiple times before hitting, and still end up a winner on the series of bets. With Implied vol so low, your cost of hedging is very cheap, so this is a trade we can stick with, knowing we'll get paid off at some point over the next 12 months.
Good Trading
In trying to find a chink in it's armor, we have noticed over the past 3+ years that whenever there is a sell-off, it happens swiftly and in the back half of the year. There hasn't been much meat on those bones, so you have to be in if you want to get a piece. With Central Banks tightening globally, and US tax cuts all but dead in the water, we believe there will be some harvesting of the sizeable 2017 profits.
To aid our efforts, It appears selling Vol is the flavor of the day, which has resulted in Implied Vol on S&P options of 10 or below. So we simply can't help ourselves and will have to take the other side of that bet. Here is how to play it.
Short Dec S&P Futures at 2463.
Buy the Dec 2465 Calls for 65
Sell the Dec 2300 Puts for 28.
The net cost of this hedge is $37, while we have profit potential of 163 points minus the hedge cost = 126
This gets you a R/R profile of 3.4 - 1 and you have 145 days for this to work, and let the annual selloff pattern play out..
In the event the freight train continues rolling the next 4 months, simply execute the same trade at the end of this one.. When you play with a 3-1 + RR profile, you can be wrong multiple times before hitting, and still end up a winner on the series of bets. With Implied vol so low, your cost of hedging is very cheap, so this is a trade we can stick with, knowing we'll get paid off at some point over the next 12 months.
Good Trading