This Trade Targets a 100%-Plus Potential Return by February 18

Option Trade Of The Day: SPDR S&P 500 ETF Trust

Over the weekend I was going through a great deal of data, from sentiment to technical analysis, daily and weekly stats. Two things that jumped out at me from the sentiment data led me to today’s option recommendation.

First, I went through the sentiment readings of the 1500 stocks in the S&P 1500. What I found was 221 stocks had extreme optimistic readings while only 103 had extreme pessimistic readings.

[hana-code-insert name=’adsense-article’ /]Secondly, the Spyders and Diamonds both hit their third highest sentiment reading of the past year on Friday.

The only two higher readings are marked on the chart below and they were March 1 and November 30.

Each time we hit those extremes, we saw a little volatility in the following days.

In November, the volatility was short lived, but in March we saw a month-long period of increased volatility.

We also see on the chart that the 10-day RSI is at one of its highest readings of the year.

The gains over the last few weeks have been so extreme that the oscillators have jumped sharply.

While I don’t usually make bearish bets on charts that look like the one above, I can’t help but worry about how overdue we are for a pullback. Another factor for me is that I like to build a portfolio of options that are somewhat balanced. There are very few times that I will have a portfolio that is completely made up of bullish bets or one that is made up entirely of bearish bets. You could consider this trade idea as a protective position for the rest of the portfolio that is made up mostly of bullish trade ideas.

Buy to open the Feb18 280 strike puts on SPY at $3.75 or better. These options expire on February 16. With these options being priced where they are, it would only take a move down to $272.50 or so for these options to double. That means that all we need on this one is a decline of 2.0 percent for the options to double. That is tremendous leverage for an option that is over a month away from expiring. While we are closing in on the record for the longest period without a 5.0% decline, expecting a 2.0% decline seems rather modest.

— Rick Pendergraft

OPTIONS DISCLAIMER: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation,

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.