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Santa Comes Bearing Gifts For SPY Stock And Bull Traders

Tyler Craig
·3 min read

The last Fed announcement of the year is out of the way, and stocks responded the same way they did at pretty much every other meeting in 2020 — with indifference. The S&P 500 ETF (NYSEARCA:SPY) closed Wednesday nearly unchanged, with traders largely looking to the weekend and the holiday-shortened week beyond. Today we’re looking at how to bet on Santa using SPY stock options.

Relative Strength Alert for The Ensign Group
Relative Strength Alert for The Ensign Group

Source: Pavel Ignatov/Shutterstock.com

With the Fed reaffirming their commitment to easy money policies, the groundwork has been laid for Santa to ride into town with a sleigh full of profits. There was only a slim chance of Jerome Powell derailing the bull train, but it’s still comforting to have the last Fed meeting of the year come and go without upsetting the status quo.

It’s not just monetary magicians at America’s central bank aiding asset prices, though. The next stimulus bill is inching oh-so-close to the finish line. Traders can taste the economic jolt that will come and have been bidding cyclical and small-cap stocks to the moon. Plus there’s a suite of novel coronavirus vaccines that have the Street anticipating and discounting a post-COVID world.

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Santa Says Buy Stocks

Bulls certainly aren’t lacking for catalysts, but they’re getting another one coming around the corner anyway.

The back half of December, particularly those sessions surrounding Christmas and the last five days of the year, host the so-called Santa Claus rally. Rather than drowning you in stats, let’s just say old Saint Nick is a friend to buyers and has historically favored them with a tailwind to equities.

There aren’t any guarantees, mind you. Perhaps buyers are so stuffed with gains that they simply can’t stomach any more. The S&P 500 is up 18% on the year and doesn’t need any extra growth to make 2020 a banner year for bulls. In fact, you could argue profit-taking is overdue and the overheated markets need to cool.

But that’s an argument you could have made at any point over the past month. And yet we’ve rallied regardless. Such is the difficulty of picking tops and nailing trend reversals. So forgive me for passing on the bearish pitch. Trading with the trend has worked for weeks and I see zero legitimate reasons to fight it with Christmas fast approaching.

Let’s take a closer look at the SPY stock chart to chronicle the uptrend’s dominance.

SPY Stock Chart & Trade

S&P 500 ETF (SPY) chart with push to record high
S&P 500 ETF (SPY) chart with push to record high

Source: The thinkorswim® platform from TD Ameritrade

Though the hottest area of the market has been small-caps, large caps have been holding their own. November 9 launched the S&P 500 out of a double bottom pattern and it hasn’t looked back since. All major moving averages are pushing higher with prices propped above them.

In fact, ever since prices returned to uptrending status following the election, buyers have consistently defended the 9-day exponential moving average and the 20-day simple moving average. Both smoothing mechanisms are popular measures of the short-term trend and common gathering grounds for dip buyers.

I don’t think there’s any reason for an overly complicated options trade. Implied volatility is low due to the extreme bullishness and looming holidays. So long premium plays are the way to go. For a stock that’s nearing $400, long calls can get pricey, so I suggest a bull call spread instead.

The Trade: Buy the Jan. $375/$380 bull call spread for $2.15

The max loss is limited to your initial trade cost and will be lost if SPY sits below $375 at expiration. The max gain is $3.85 and will be yours if SPY can rise above $380 over the next month.

On the date of publication, Tyler Craig held LONG positions in SPY.

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