Just weeks ago, we highlighted how a reasonably probable options trade on the S&P 500 ETF (SPY) could have yielded a staggering 3,000% return – read You Missed A 3,000% Profit Opportunity On The S&P 500 – Be Prepared For The Next One. That opportunity has passed, but the market’s recent surge and looming uncertainties suggest that another significant move may be on the horizon. And here is your chance to go long on volatility, and potentially set yourself up for a 1000% profit opportunity.
The S&P 500 has climbed above $590, buoyed by optimism over potential tax reforms and a temporary delay in European tariffs. However, this tranquility may be short-lived. There is likely turbulence ahead. We aren’t telling you the direction – all we are saying is that market volatility may increase, and you could take advantage of that by buying a straddle (call and put options both).
While these are short-term opportunities that emerge from time to time, real wealth is created by compounding money over the long-term. That’s exactly what the Trefis High Quality (HQ) Portfolio is designed for, and has returned >91% since inception, outperforming S&P 500, Dow, and Nasdaq, all of them.
What Could Move The Market?
Several factors could disrupt the current market calm:
- European Tariff Deadline: President Trump has postponed the implementation of a 50% tariff on European Union goods to July 9, 2025. If trade negotiations falter, these tariffs could take effect, potentially igniting a trade war and unsettling global markets.
- Escalating U.S.-Russia Tensions: In recent statements, President Trump labeled Russian President Vladimir Putin as “absolutely crazy” and warned that he was “playing with fire” due to ongoing aggression in Ukraine. Such rhetoric increases geopolitical risks that could impact investor sentiment.
- Uncertain Tax Legislation: The U.S. Senate is currently deliberating a comprehensive tax reform bill that includes significant cuts and spending changes. Internal divisions within the Republican Party raise questions about the bill’s passage and its potential economic implications.
So What Do You Do?
You go “long on volatility” – something not a lot of investors think about. When a shake-up like this happens, volatility spikes. Option prices go up. Therein lies your opportunity with limited risk.
SPY put for 5% out of the money strike ($561) expiring 1 month out (27th June) is currently trading at premium of $3.84. For the full contract (100 shares), that becomes $384. Now, if the S&P 500 were to fall sharply over the next 2-3 weeks, not only will the put price gain because of index decline, it will also gain because of the increase in implied volatility – a key ingredient in pricing options. And that means that a 10% down move – to around $530, will be sufficient to 10x the put prices – a 1000% gain opportunity.
And let us remind you, SPY hit a bottom of $482 just last month so a retracement to $530 is not out of reach. And if you think the market can explode on the upside too, then hedge your put purchase with 5% out of the money call that’s currently trading at an even lower premium of $1.22. Clearly, the market is more fearful about the downside.
You could also buy near term options if you think the shake up could happen sooner – that may have an even higher payoff because the premiums will be lower.
The Risk
Remember, the trade can go wrong. The market may stay range bound, or may move but not enough. If that happens, option prices may not move much, or even decay. But here is the thing: you will be entering a defined-risk trade that has the potential to pay off big if things go your way. So the smart thing to do is to limit the contract size to a point where you are comfortable with the risk. And risk = premiums you pay for buying puts, or puts and calls both if you go for a straddle.
Conclusion
While the previous 3,000% opportunity has passed, the current market environment presents new possibilities. By staying informed and considering volatility-focused strategies, investors can position themselves to capitalize on potential market shifts.
But here’s the thing: Short-term volatilities in the market are not uncommon and are often challenging to navigate. However, long-term outperformance is hopefully what matters to you. If so, consider investing in the Trefis High Quality (HQ) Portfolio, which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics
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