After getting crushed Friday, the markets are moving higher on renewed hopes of a trade deal.
The Dow fell more than 700 points at the lows of Friday's session after President Donald Trump called for American companies to completely pull out of China, and threatened to hike tariffs on $250 billion of Chinese goods beginning Oct. 1. But Trump changed his tune Monday morning, saying the U.S. and China would be "getting back to the table" on trade negotiations, which sent the Dow surging more than 150 points.
Whether or not this recovery can be sustained remains to be seen. However, if you're feeling bullish in the short term, Optimize Advisors President Michael Khouw has a way for you to get in on the cheap.
"Even if the news that we've had — as bad as it has been — turns worse, it's not uncommon for us also to see bear market rallies," Khouw said Friday on CNBC's "Options Action."
"We are seeing considerable volatility, and relative to the volatility we are seeing, we are not actually seeing options premiums as high as they might otherwise be."
As Khouw pointed out, a big reason for this is that the Volatility Index , the VIX, is probably not as elevated as it should be.
"We've averaged just under 1.5% intraday moves since the beginning of the month. With the VIX sitting around 20, [it] should be probably 50% higher than that when you're seeing moves of that kind of magnitude," said Khouw.
Since options premiums are at bargain levels, the strategy Khouw illustrated was a bullish bet on a short-term bounce in the S&P 500 ETF, targeting the $300 level and using a call spread to define and limit risk.
"I was looking out to September," said Khouw. "You could buy the 295/300 call spread. You'd be spending about $1.20 to put that trade on, so the payoff is going to be better than 3 to 1 if we get a move up to 300 which, by the way, is approximately where we were at the beginning of this month."
The S&P 500 ETF was trading 0.4% higher on Monday.
