The Smart Way to Play the Market: Stutland
As options on the S&P 500 became more expensive Monday, one big trader "SPY"-d an opportunity.
On Monday morning, one option trader took advantage of the uptick in the VIX to sell out-of-the-money puts on the S&P 500 ETF (SPY) expiring this week. This trader sold 40,000 152-strike puts expiring this Friday for $0.26 each.
By selling this option, the trader commits to buying the SPY for an effective price of $151.74 if it is below $152. If the SPY stays above $152, then this trader will make $0.26. Therefore, this is a trade that will create income if the market is up or unchanged—and allows the trader to buy the market into weakness.
(Read More: Stock Crash Likely If Rally Continues: Marc Faber)
Options experience exponential time decay as expiration approaches, which make selling weekly options a lucrative trade. When you sell weekly SPY puts, the risk is that the market makes a sharp move down, and the puts increase in price rapidly.
As long as the puts are sold cash-covered, i.e. do not use leverage, then the position has less risk than a long stock position. Over time, put-write strategies have been shown to produce better risk-adjusted returns than a buy and hold strategy, which is why this is our preferred way to be invested in the market going in to the seasonally volatile summer months.
I am actually short a similar put, along with owning the SPY, and also being short calls. Collecting income from options in a market that seems to be trying to feel itself out at this point is an effective way to pick up some alpha—or in other words, to outperform the market.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
Disclosures: Stutland is long SPY, and short puts and calls