Hey there, Power Profit Traders!
The holiday week continues, and I trust that you are making the most of it by spending time with family and friends – that is what’s most important, after all.
But while I’m taking it pretty easy this week, the markets stop for no one this year – with an obscure NYSE rule meaning Wall Street will be working on New Year’s Eve. (Markets are usually closed on Friday, whenever New Year’s Day falls on a Saturday, but only bond markets close early this Dec. 31.)
In fact, while stock markets are closed on weekends and the occasional holiday, many analysts and traders continue to grind after hours, doing their research and due diligence. So although we might see light volume, never think Wall Street is asleep…
Light volume is, of course, the story this week, and essentially has been since quadruple-witching expiration on Dec. 17.
However, there are plenty of opportunities for profits, even amidst lighter trading volume. Plus, for this entire week only, it’s a Money Morning LIVE Open House!
We’re giving viewers a backstage pass into select PREMIUM trading rooms absolutely free. It all kicks off at 9:15 a.m. ET right here. (And don’t forget, you can now watch REPLAYS of my sessions right here!)
And today, I want to break down a two-legged call options trade – what I call a “Green Loophole trade” – that I just wrapped up for a nice year-end gain, thanks to a bit of patience.
This strategy allowed me to bet bullishly on a Santa Claus Rally without breaking the bank.
In addition, I’ll review some of the recent price action we’ve seen in the markets, and discuss a couple events on the horizon for Wall Street in early 2022.
Santa Comes Through for the S&P 500
Month-to-date, the S&P 500 Index (SPX) has returned 4.92%, at the time of this writing, bringing the year-to-date tally to an impressive 29.23%.
Although the SPX got shaken up a bit after Thanksgiving, it’s come roaring back to life lately, touching a record intraday high on Tuesday before ending the session slightly lower.
Some of this may be attributable to the resounding economic success of late, with the bounce-back in third-quarter growth already revised upward to 2.3%, and Bloomberg’s compiled estimates for the fourth quarter now set for 6.0%, up last week from 4.8% growth.
In addition, jobs are plentiful, wages are up, and consumer confidence and spending are all positive leading into 2022. And even with inflation rearing its ugly head, we are not seeing credible signs of the dreaded ’70s stagflation.
Of course, we could get more insight into inflation when the Fed releases its latest meeting minutes, expected sometime in early January.
Earnings reports will also begin to file in around mid-month, with big banks kicking things off.
As of now, Bloomberg’s compiled expectations for SPX members indicate an average year-over-year revenue gain of 18.78%, and an average quarterly earnings-per-share increase of 24.62%.
Meanwhile, as the SPX warmed back up, the CBOE Volatility Index (VIX) cooled off quite a bit since its Dec. 1 high above 31, ending yesterday at 17.54, indicating that implied volatility (IV) for short-term SPX options has dropped significantly.
This is good news for option buyers in general, because lower IVs mean cheaper option premiums.
But how can you place a trade when option prices are running high – without risking too much capital?
I’ll show you now by breaking down a recent winning “Green Loophole Trade” from my Fast Fortune Club.
I SPY a Gain
The gains in the S&P 500 have, of course, also been enjoyed by the corresponding SPDR S&P 500 ETF Trust (SPY).
On Dec. 9, I wanted to bet bullishly on the SPY, but with IV and option prices running hot at the time, I wasn’t comfortable simply buying call options.
After all, the premium you pay for an option represents your maximum risk, so as with anything you buy, you don’t want to overpay.
Instead, I put on a bull call spread. That means I:
- Bought to open a $471-strike SPY call expiring Jan. 21, and
- Simultaneously sold to open a $474-strike SPY call in the same series
I received an initial credit from selling the higher-strike call, which helped to offset the cost of my bought $471-strike call – and, thus, my maximum risk. It also lowered my breakeven on the trade.
The trade-off was sacrificing some of my potential reward on the upside, should SPY move above $474 (the sold call strike) before the options expired.
But I was comfortable with that risk/reward profile, which is the cornerstone of a Green Loophole trade.
SPY Price & Volume – Source: Bloomberg
And while the trade had a few down days before Christmas, my technical and Money Calendar analysis indicated a Santa Claus Rally was set to work – and that’s exactly what happened.
I ultimately closed my bull call spread for a healthy gain, making for a holly, jolly Fast Fortune Club trade!
So, kids, that’s your Power Profit Trades lesson for today. Be sure to take advantage of your peek behind the paywall with LIVE premium content starting at 9:15 a.m. ET right here!
Have a great day!
Tom Gentile
America’s #1 Pattern Trader
