Momentum: Lower-Cost Trade Strategy for S & P 500 After Reaching New All-Time Highs

Investors in New York City are celebrating as the first six weeks of 2024 have been lucrative, with the equity market reaching new all-time highs. The $8 trillion in cash sitting on the sidelines represents cautiousness among some investors, while others focus on the better-than-expected earnings season, continued consumer strength, and cooling inflationary data in the U.S. Global investors are also eyeing the possibility of the S&P 500 hitting the 5,100 mark before falling below 4,900.

Despite warnings from JPMorgan equity strategists that the upside for global stock markets may be limited, the VIX index, which measures short-term volatility, is currently low, indicating that option traders are not worried about the S&P 500 in the near future. To capitalize on the momentum of the S&P 500, some investors are considering trading call spreads to further participate in the potential upside for the index. A specific trade involves buying a vertical bull call spread, where an investor buys a call option while also selling a call option to offset the cost.

This strategy allows investors to have upside exposure at a reduced cost compared to simply buying the underlying stock. The trade involves buying a March regular expiration $500 call for $7.45 and selling a March regular expiration $510 call for $3.15, resulting in a net debit of $4.30 to buy one call spread. The break-even price for this spread is calculated to be SPY trading at $504.30. It’s important for investors to carefully consider their individual circumstances and seek advice from financial or investment advisors before making any decisions.

Ultimately, the current market conditions suggest that some investors are confident that the S&P 500 has the potential to reach new heights, and they are exploring different trading strategies to participate in the anticipated upside. However, it is crucial for investors to conduct thorough research and consider their risk tolerance before engaging in such trades. The market’s future performance remains uncertain, and it is essential for investors to approach it with caution while seeking professional financial advice.