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Believe It or Not, New Highs Are Likely in the S&P 500

We're looking for the VIX to work its way lower over time and the S&P higher, but it'll be a bumpy ride.
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The Fed has made it clear: they have shown up to the fight with brass knuckles and it probably won't pay to go against them. The Federal Reserve's move to purchase corporate debt individually, rather than via ETFs, will likely go a long way toward market stabilization. Recalling the 2008 and 2009 debacle, investors repetitively sold stocks as they eyed the spread between corporate bonds and risk-free Treasuries. Thus, keeping the spread tight will avoid the tendency for investors to use it as a signal to liquidate risk assets. Of course, there could be unintended consequences of these actions down the road but that is another discussion.

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Chart Source: QST

Although the VIX is well off its March highs, it is still elevated based on historical standards. This suggests investors still aren't comfortable with the landscape, but it also creates some attractive opportunities for low-risk and high-reward trades for option traders willing to play the long game. We are looking for the VIX to work its way lower over time and the S&P higher, but it will be a bumpy ride.

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Chart Source: QST

Last week we were viewing the 3,000 level in the E-mini S&P as a significant psychological and technical level. Although messy, that level held late last week which leave the bulls in control and opens the door for a retest of the all-time-high near 3,400. The RSI, Relative Strength Index, seems to support this premise - it's midrange and pointing higher. Accordingly, traders looking for a tame and limited risk way to play this might construct a call butterfly that pays out between 3,200 and 3,400. For instance, the purchase of a September E-mini S&P 500 3200 call, the sale of two 3300 calls and the purchase of a 3400 call creates a call butterfly with risk limited to about $700 and a max profit of about $4,300 if the futures price is at 3,300.00 at expiration.

*THERE IS A SUBSTANTIAL RISK OF FINANCIAL LOSS IN TRADING FUTURES AND OPTIONS.

At the time of publication, Carley Garner had no position in the securities mentioned.

*There is a substantial risk of loss in trading commodity futures, options, ETFs. Seasonal tendencies are already priced into market values. -Carley Garner