Trade Alert - (SH) March 14, 2025 - BUY

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline.

 

Trade Alert - (SH) – BUY

BUY the Proshares S&P 500 ETF (SH) April 2025 $40-$43- in-the-money vertical Bull Call debit spread at $2.60 or best

 

Opening Trade

3-14-2025

expiration date: April 17, 2025

Number of Contracts = 40 contracts

We have a nice little $10 pop in the (SPY) this morning, giving us a rare chance to get off more short positions.

I spent the weekend shopping for more downside protection for US equity portfolios and this is the best one I could find. There are a lot of them designed to do nothing more than pick your pocket, but I think I found a good one.

If the last two weeks have been painful for your long-only portfolio, this is a way to protect it from additional losses. It may also help you sleep better at night. It will reduce the day-to-day volatility of the net asset value of your account. But like all insurance policies these days, it doesn’t come cheap.

Not bad.

Ideally, you will add this position on a day when the stock market is up and the early players are taking profits.

The Proshares S&P 500 (SH) is an inverse ETF that rises in value when the index falls on a one-to-one basis. Its current NAV is $863 million. It makes an excellent hedge for tech-heavy stock portfolios, with a hefty 32.6% exposure to the sector and 7% in Apple (AAPL) alone. If the (SPY) drops by 15% from here by the August 16 option expiration, this fund should rise by 10% to over $46.

I am therefore buying the Proshares S&P 500 ETF (SH) April 2025 $40-$43- in-the-money vertical Bull Call debit spread at $2.60 or best.

DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES.

Don’t pay more than $2.80, or you will be chasing.

Simply enter your limit order, wait for a few hours, and if you don’t get filled, cancel your order and increase your bid by 5 cents with a second order.

This is a bet that Proshares S&P 500 ETF (SH) will not fall below $43 by the April 17, 2025 option expiration in 24 trading days.

There is a catch.

Inverse ETFs have their own special problems and are ideally designed to be traded intraday. They are not cheap. There can be tracking errors, although the (SH) has tracked pretty well over time. There is a contango because the fund managers have to borrow money at around a 6% annual interest rate to buy the futures contracts that the fund invests in.

You also have to cover the cost of paying dividends for the S&P 500, now at a 1.2% annualized rate. There is a derivative risk in that the futures contracts that the fund buys, in theory, could default.

You also have a compounding risk because the fund is reset at the end of every day. That means that if the (SPY) goes up and down frequently over a short period of time, the value of the (SH) will fall.

All in all, the S&P 500 has to drop about 5% by August 16 just to cover all of the costs associated with this short position.

I did take a close look at another ETF, the Proshares Ultrashort S&P 500 ETF (SDS), a leveraged -2X short ETF. The problem here is that with twice the short position, you are paying twice the expenses. The borrowing cost goes from 6% to 12% annualized, and the short dividends go from 1.2% to 2.4%. The (SPY) would have to drop a lot just to cover these expenses unless the drop happens immediately.

It’s great for catching short, sharp selloffs. If you bought the (SDS) on February 18 bottom, you would have made a quick 12% profit on a 6% decline in the (SPY).  But for a five-month hold, you are giving up the first 12% move to expenses.

To learn more about the (SH) ETF, please visit their website at https://www.proshares.com/our-etfs/leveraged-and-inverse/sh  

Here are the specific trades you need to execute this position. You must place an order for this single vertical bull call debit spread.

Buy 40 April 2025 (SH) $40.00 calls at………….……..$6.50

Sell short 40 April 2025 (SH) $43.00 calls at…………$3.90

Net Cost:……………………….………..………….….............$2.60

Potential Profit: $3.00 - $2.60 = $0.40

(40 X 100 X $0.40) = $1,600 or 15.38% in 24 trading days.

 

 

 

If you are uncertain about how to execute an options spread, please watch my training video by clicking here.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep-in-the-money spread trades can be enormous.

Don’t execute the legs individually, or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.