February was another great month for U.S. equities as each of the three major indices chalked up all-time highs and two of the three indices had their best February in almost a decade. However, March Madness is upon us and markets are kicking off the month slightly mixed. This potential profit taking contrasts with the positive reaction to inflation data this week which showed a continued cooling trajectory. I remain optimistic on markets during this election year of 2024, but here is a short-term trade strategy that profits if volatility returns and profit taking becomes a theme during the last month of the first quarter. The S & P 500 and the tech-heavy Nasdaq each notched their best February returns since 2015, while the Dow had its best February since 2021. This is noteworthy as historically there has been “seasonal” weakness associated with February returns, due to portfolio repositioning and earnings season disappointments. The Q4 earnings season has not disappointed though. With 97% of S & P 500 companies reporting actual results, investors have seen 73% of these firms exceed EPS estimates while the S & P 500 reported growth of 4.0%, according to FactSet. This is the second straight quarter of year-over-year growth for the benchmark index. If 4.2% ends up being the actual revenue growth rate for the quarter, it will mark the 13th consecutive quarter of revenue growth for the index, according to FactSet. Time for hedging So why am I concerned now about a slight pullback? It is more about the opportunity I see at these overbought levels as the SPDR S & P 500 ETF (SPY) is trading at RSI levels of 76. Markets seldom move in straight lines and this recent run from November has been tremendous. I want to sell a SPY ‘risk reversal’ and utilize some of the options premium being collected to finance and reduce the purchase cost of a downside put. The trade Selling A SPY Risk Reversal: Sold the 3/28 quarterly (Thursday) expiration March $525 SPY call for $1.05 (collected) Bought the 3/28 quarterly (Thursday) expiration March SPY $490 put for $1.45 The result in the sale of the 3% out-of-the-money $525 call (as SPY was trading $509 at the time of this trade) and the purchase of the downside $490 put results in a debit spread costing $0.40 or $400 for every one lot. As markets continue to move higher and attract the record amount of cash ($6 trillion) sitting on the sideline, I believe it is important to remember, even with the CBOE Volatility Index at 13, sentiment can turn on a dime. .VIX 1Y mountain CBOE Volatility Index, 1 year Stay nimble as March Madness is on its way. DISCLOSURES: (Kilburg owns the risk reversal) 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.
