The second quarter for U.S. equities is off to a rocky start. Is this the beginning of a pullback or just simply a bump in the road in this new bull market? The S & P 500 is up over 21% in the last five months, this parabolic move higher urges me to establish a hedge. I seek to protect profits and capitalize if the S & P 500 decides to reverse course and test the will of the bulls short-term. SPY 1Y mountain SPDR S & P 500 Trust (SPY) The S & P 500 is coming off a 10% gain for the first quarter, its best start to a year since 2019. Q1’s impressive performance is in addition to the gains of 12.5% when markets saw buyers emerge last November and December. However, stocks saw volatility return this Thursday as equities stumbled in an unusual trading session with a near 2% intraday bearish reversal in the SPDR S & P 500 ETF (SPY) . The CBOE Volatility Index — the fear gauge known as the ‘VIX’ — vaulted to its highest level of 2024 despite closing at a still historically subdued level of just 16. .VIX 1Y mountain CBOE Volatility Index this year Markets have a lot to contend with as the inflationary picture remains unclear and the Fed’s committed interest rate path is now being questioned on a daily basis. A recent jump in oil prices (stoking inflationary pressures) could restrain the Fed from kickstarting their interest rate-cutting campaign in 2024. Yet, the Fed should be pleased with a better-than-expected jobs number. Another input for this short-term bearish view of mine is the recent rise in U.S. Treasury yields as markets are unequivocally questioning the credibility of the Fed’s “three cuts” promise in 2024. The 10-year yield traded 4.40% subsequent the release of the nonfarm payrolls data. The 10-year yield has risen more than 50 basis points thus far in 2024. (1 basis point equals 0.01%.) Equities have dislocated from its typical correlation and sensitivity to rates, this raises an eyebrow for me. US10Y YTD mountain 10-year U.S. Treasury yield, YTD The SPY Hedge Trade I want to buy a put spread and define the premium spent for this hedge trade: Buying a SPY Put Spread (regular May expiration expiry) Bought the 5/17/24 regular expiration $500 SPY put for $4.25 Sold the 5/17/24 regular expiration $480 SPY Put for $1.80 Net debit to establish this put spread was $2.45, or $245 per one spread. In the event we do see the S & P 500 back-n-fill down to the January levels of 4,950, this put spread will fill out — meaning that you would make the $20 (difference between the $500 strike price and the $480 strike price) minus the $2.45 you initially spent on this spread which translates into a $1,755 profit from this hedge. In the event the market moves higher, you have defined your risk in this spread and any long equity exposure you may have to the S & P 500 should offset this trade. Stay nimble. DISCLOSURES: (Long SPY and this put 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.
