Markets remain in melt-up mode as shorts run for cover. U.S. equities opened higher once again on Friday morning after the S & P 500 and Nasdaq 100 both notched another closing all-time high on Thursday. That is the S & P 500’s ninth record close of the year. I believe the S & P 500 will continue to move higher this summer, but I want to use options on SPDR S & P 500 ETF Trust (SPY) to define risk in the event the underinvested and shorts take a break from chasing stocks higher. Another catalyst that has been added into the bull case is the continued lowering inflationary data (or lack of inflation appearing from trade tariffs) coupled with robust initial Q2 earnings reports. Although it’s early in the earnings season as the big banks just kicked off the reporting period this week, 51 of the 55 companies that have reported earnings since the start of season this week have beaten consensus analyst EPS estimates. That’s a beat rate of 93%, well above the 20-year average beat rate of 63%, Bespoke Investment Group data shows. Optimism abound, but I believe it is also prudent to define risk when investors experience a severe sentiment shift as markets have endured since April. As many strategists tripped over themselves to lower their 2025 S & P 500 price targets subsequent the “liberation day” initial trade tariff sell-off, that highlighted a buying opportunity as the VIX vaulted over 60. Now that these same analysts are readjusting their S & P 500 price targets significantly higher, I have short-term caution on how much more room this melt up may have. However, there is a record amount of money sitting in cash potentially looking to get back in the equity markets and moreover, that is why I prefer to use options to define that risk and exposure. Normally, I would like to utilize a call spread to reduce cost into upside participation. Due to the parabolic move that we have witnessed since the S & P 500 kissed 4,800 in April, I do not want to limit my upside here and I am comfortable risking the (expensive) amount I am paying for this upside call I am buying. Owning the call is more strategic than owning SPY at these levels. I am also using this as a stock replacement strategy as I am closing some of my long SPY position. Buying a SPY call option Bought the Aug. 29 SPY $630 call for $12.90 This call option is a debit of $1,290 This trade was executed when SPY was roughly trading $629 DISCLOSURES: Kilburg is long these $630 calls, long SPY 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.
A simple options strategy that defines investor risk as the S&P 500 reaches new heights
