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“Bulls take the stairs up, bears take the elevator down” underscores the typical market behavior, where bullish trends exhibit a gradual ascent with occasional minor setbacks, while bearish corrections and pullbacks tend to be swift and steep. However, last week’s mind-boggling rally following the Federal Reserve’s decision to forgo another rate hike caught many investors by surprise. Conventional wisdom implies that this surge was largely influenced by a short squeeze, and any signs of weakness may trigger rapid profit-taking, potentially leading to a pullback Based on this thesis, I want to make a bearish bet on the SPDR S & P 500 ETF Trust (SPY) using a trade structure called a bear put spread. To further support my bearish bias, I am using the following criteria I am using 2 technical indicators in the chart below: 50-day simple moving average: In down trending markets, the 50-day SMA acts as resistance. SPY is hovering around the 50-day SMA, which is approximately at $433. RSI (Relative Strength Index): Counter-trend relief rallies are common in bear markets. But you will notice that the area around $60 usually acts as resistance where these counter-trend rallies fizzle out. In SPY’s chart below, RSI is flattening out around $60 which indicates stalling upward momentum. The trade set-up: A bear put spread Now that I have a directional bias in place, all I need to do is find a trade structure which will allow me to bet on a downward move in SPY. The trade structure I am going to use here is called a “bear put spread” also known as a “put debit spread”. SPY is a highly liquid ETF and if you glance at its option chain, you will notice that it offers $1 wide strikes. This is great, because traders can construct a $1 wide put spread and risk as little as $50 to make $50 per winning trade. To increase risk, traders simply add more contracts. Eg. doing a 100-contract trade would risk $5,000 to make $5,000. All I need is for SPY to drop by $1 by expiration date for this trade to double my money. Here is the exact trade setup: Buy $434 put Dec 1 expiry Sell $433 put Dec 1 expiry Limit Price: 50 cents Profit target: If SPY is trading at $433 or below on expiration date, this trade will generate a 100% return on investment on the amount risked. Managing losses: An important part of any profitable trading system is that it needs to have positive expectancy. That means the winners need to add up to more than the losers. For me to create positive expectancy with this trading strategy, I will close this trade if I lose 50% of my investment (i.e. 25 cents). By doing this, every winner will cancel out two losing trades. DISCLOSURES: (Nishant currently has a bear put spread on SPY expiring on 12/8/2023) 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.
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