By Chris Ebert

The S&P 500 Temperature is a measure of the point level of the S&P 500 with regard to the level at which Covered Calls opened at-the-money 4-months earlier on $SPX (or $SPY) would break even. For example, if one opened a Covered Call using an at-the-money strike price back in February using an early-June expiration, the S&P would now be some 300+ points above the point at which this week’s expiring June Covered Call would break even. And while it’s not a perfect indicator by any means, it does tell a story.

There have been very few times historically over the past 20 years when the S&P has risen so high over the break-even point. Below is a chart of the past 10-year history of the S&P 500 Temperature, which shows just how rare it is to reach a Temperature of 300.

Given the sparse historical data, the implications of the S&P being so high above the break-even point are debatable. It could mean the S&P is overheating and is getting ready to pull back a bit. It could also mean that traders are now so confident that nothing will stop them from driving the S&P higher, not bad economic news, not poor employment numbers, not natural disasters or even wars. It’s not uncharted territory, per se – the S&P has been at these levels before – but the data is not sufficient for back-testing hypotheses as to the possible outcomes.

Points Above Bear June 2016

* Option strategies referenced above are analyzed for profit or loss on expiration day only and are opened using an at-the-money strike price, 4-months to expiration, using options traded on a broad-based ETF such as $SPY (NYSEARCA:SPY)

The preceding is a post by Christopher Ebert, Chief Options Strategist at Astrology Traders (which offers subscribers unique stock-trading perspectives and options education) and co-author of the popular option trading book “Show Me Your Options! Chris uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca

 

Related Options Posts:

Thursday Evening Options Brief 25-Feb-2016

Thursday Evening Options Brief 18-Feb-2016

Historical Bear-Market Option Performance

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