There seems to be widespread agreement that tax rates affect
stock prices. Unfortunately, for traders looking for an edge in the
stockmarket , there is no evidence showing what that effect is.
There have beenbull markets when tax rates fell, and there are
examples of bull markets that survived tax increases. And traders
have enduredbear markets whentaxes increased, as well as when they
This time aroundwill be the same, and whether tax rates increase
or decrease, stock prices will continue to move up and down. If a
deal is announced, we are likely to see market volatility. Without
a deal, we are also likely to see volatility as traders react to a
breakdown in negotiations. Rather than trying to forecast the
direction of the price move, we can open a trade that will benefit
from an increase in volatility whether prices rise or fall.
An options trade known as a straddle uses an equal number of put
andcall contracts on a stock orETF . The options have the
sameexpiration date andstrike price . With a straddle, a trader is
trying toprofit from a large price move, regardless of the
A straddle on
ProShares Ultra S&P500 (
offers a way to benefit from the expected move. SSO is trading at
about $59. Calls with a strike price of $59 are trading at $1.58
and puts at that strike price are $1.48. The combined cost of the
position consisting of one call and one put will be about
Because SSO is a leveraged ETF, the fund's managers rebalance
its holdings daily. That means the fund will not precisely match
the movements of the S&P 500 over the long term. However, the
trend in the price will generally match theindex during a period of
several weeks. Since the options expire at the close of trading on
Dec. 21, the daily rebalancings should not present a significant
If SSO moves up by about 5%, this trade should be profitable.
The call should be worth at least $3.06 if SSO reaches $62.06 (a 5%
gain), while the put could be nearly worthless at that point.
Because SSO is leveraged, a 2.5% change in the S&P 500 should
result in a move of that size in the ETF.
On the downside, if SSO falls to $55.94 (a 5% loss), the put
should be worth at least $3.06 and the call would be
worthless, and the trade would be profitable if SSO moves lower
than that. This could be achieved with a 2.5% decline in the
The chart below shows that SSO has had one-week moves of $5 or
more when market volatility spikes. Given that there are three
weeks before expiration and a high probability of a news-driven
move in the stock market during that time, I believe it is likely
we will see a price move of that size or more soon.
Theaverage true range (
) shown in the chart below has been in a range of relatively low
values and spikes in theATR , seen when prices make a large move,
have not occurred for more than a year, so SSO could be due.
This is a highly speculative trade, but the risk is limited to
the amount paid for the options. Any loss on the trade is likely to
be less than the amount paid, and there is a high potential that
traders will enjoy a large reward from this trade if there is a
large move in the market.
Action to Take -->
Buy an equal number of SSO Dec 59 Calls and SSO Dec 59 Puts for a
combined cost of $3.50 or less. Do not use a stop-loss (one of the
options should have some value at expiration, which should reduce
the amount of a potential loss). Setprice target at $5 for a
potential 43% gain in three weeks.
This article originally appeared on TradingAuthority.com:
This Play Could Gift Traders a 43% Return Before
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