Volatility has returned to equity markets with investors enduring this week the second largest spike in the CBOE’s VIX Index ever. I want to embrace this historic volatility and capture the extra amount of premium that has been injected into S & P 500 options. Although markets are short-term uncertain regarding the government shutdown and Fed policy path in 2025, I have confidence that the stock market will stabilize after a much-needed repricing in megacap tech stocks, specific to certain AI darlings in the Magnificent 7. .VIX YTD mountain CBOE Volatility Index, YTD A government shutdown is also weighing upon equites. If both chambers of Congress are not able to agree on a deal to pass a funding bill by midnight Friday, the government will officially shut down at 12:01 a.m. on Saturday morning. President-Elect Donald Trump also floated the elimination of the debt ceiling, that has added emotion too. The acute and violent reaction this week to the Fed most likely scrapping their 2025 interest rate forecast, rattled investors and incited a massive selling spree in U.S. equites dropping the S & P 500. The SPDR S & P 500 Trust (SPY) is only 4% off its all-time high put in earlier this week and might have the ability to further test technical levels. The highly traded SPY dipped below its 50-day moving average at 591 and investors now are eyeing $551, where the 200 day sits. The S & P500 200-day moving average has not been tested all year in 2024 as markets have pushed higher each and every quarter. SPY 1M mountain SPDR S & P 500 Trust, YTD When the VIX spikes and emotions surge, the amount of option premium that people are willing to pay increases dramatically. The trade I want to capitalize in that premium “uptick” by being a seller of volatility…not a buyer. Therefore, I will respect the S & P 500’s technicals and use this chaotic market action to create a significant income stream, call it a synthetic ‘yield of fear.’ I will define my risk in the event this equity decline evolves into a deeper and broader equity market correction. The Trade (Selling a put Spread) Sold the 1/17/2025 SPY $570 put for $7.00 Bought the 1/17/2025 SPY $540 put for $3.75 Collected $3.25 of $325 per one put spread This was executed when SPY was roughly trading $582 DISCLOSURES: (Long SPY/Long this put spread.) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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.
