A low-cost way to protect against further market declines and position for an eventual comeback

Published Fri, Apr 19 202410:21 AM EDT

Market uncertainty persists as geopolitical tensions continue to mount in the Middle East. The Israel-Iran conflict is ratcheting up versus calming down. I want to protect further downside in the broader U.S. equity market despite the fact that S & P 500 has had an acute drop of more than 5% off its recent 2024 highs. I do believe that we are still in a bull market, but the headwinds are strong in the current market conditions. The recent jump in U.S. Treasury yields due to the ever-evolving narrative from the Federal Reserve on their rate-cutting campaign is problematic. With the 10-year note yiled popping above 4.60%, some market participants believe this to be a signal that the Fed will actually have to hike rates again versus kicking off their rate cutting campaign. This sentiment was echoed this week by Federal Reserve Bank of Atlanta President Raphael Bostic when asked directly about inflation being too high. .SPX YTD mountain S & P 500 YTD Lastly, markets are contending with corporate earnings season. Expectations are high as earnings growth is modestly accelerating and earnings estimates continue to broadly go up. It is still quite early in the reporting season and all eyes will be on the imminent Big Tech reports. Per my friends at Factset, the S & P 500's valuation on a forward 12-month P/E ratio is 20.6. This P/E ratio is above the 5-year average 19.1 and substantially above the 10-year average at 17.8. This trade continues my recent and profitable theme of protecting profits, yet it also may position me to be long after further carnage to the downside. I want to use a "1x2 put spread" to express my view on the current (short-term) markets. The Trade Buying a 1x2 Put Spread in the SPDR S & P 500 ETF Trust (SPY) : Buy one $480 SPY put (5/31/2024 expiration) for $ $4.00 Sell 2 $450 SPY puts (5/31/2024 expiration) for $ $1.30 each (total collect on two puts of $2.60) SPY YTD mountain SPDR S & P 500 ETF Trust (SPY), YTD This debit spread of $1.40 (or $140) per 1x2 defines risk to the downside, but this trade may also cause an investor to be assigned a long position in SPY below $450. I am comfortable being long at that level and by selling the extra $450 put, I defer the option premium it costs to buy that closer put at $480. DISCLOSURES: (Long this spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.