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Yesterday's market whipsaw created a high-probability options setup. Here's how to play the potential bounce while managing risk.

MARKET SNAPSHOT

📈 Market Volatility Spike – VIX touched 60 briefly as tariff fears triggered a selloff before a strong recovery.

📉 Technical Support Holds – S&P overnight lows near 4840 perfectly matched head-and-shoulders projection.

🔭 Options Skew at Extremes – Put/call skew reached COVID-era levels, creating prime setup for our featured strategy.

MARKET BREAKDOWN

Macro Lens – Tariffs Driving Uncertainty

Markets continue to grapple with potential tariff impacts as we saw a Pittsburgh aerospace supplier declare force majeure on parts deliveries. This highlights the real-world supply chain disruptions tariffs could trigger, particularly for companies operating on thin margins. Meanwhile, all eyes are on this week's CPI data as traders recalibrate Fed rate cut expectations amid the economic uncertainty.

Sector and Stock Watch – Supply Chain Vulnerability

Companies with complex international supply chains are showing heightened sensitivity to tariff news. The aerospace sector's early reaction suggests industrial manufacturers may face similar challenges, creating targeted opportunities in these verticals as the situation develops.

Trading Strategy in Focus – Exploiting Extreme Skew

When market fear reaches extreme levels (as measured by options skew), experienced traders look for ways to capitalize. The gap between put and call pricing has reached levels not seen since the COVID crisis, making certain option structures particularly attractive. Bear market bottoming processes typically feature violent swings in both directions – perfect for strategies that can profit from movement rather than requiring precise directional calls.

Smart Trade Idea: SPY Put-Protected Call Spread

Trade Setup:

• Buy to Open 500 Call, April Expiration, Limit Order, Day

• Sell to Open 520 Call, April Expiration, Limit Order, Day

• Sell to Open 465 Put, April Expiration, Limit Order, Day

Entry Price and Risk Reward:

• Cost: $5.00 Credit

• Max Profit: Substantial upside if SPY rallies between 500-520

• Breakeven: 465 on the downside (below overnight lows)

Management Plan:

• Consider taking profits if position reaches 50% of max value

• Exit position entirely if market breaks below 460

• Roll up put leg if market stabilizes above 490 for added protection

Open This Trade Instantly with Trade Link on Tradier Brokerage!

NOTE: Remember, options trading involves substantial risk and is not suitable for all investors. Consider your investment objectives, financial resources, and experience level before implementing this or any options strategy.

DISCLOSURE: Trade recommendations may have changed since publication. Evaluate current market prices and risk/reward before acting. Trading involves significant risk and is not suitable for everyone. This is not personalized investment advice. Past performance doesn't guarantee future results. Publisher and contributors may hold positions in recommended securities. Readers assume full responsibility for their trading decisions. Consult a financial professional before investing.

I waited until the end of Monday's volatile trading session to comment on this trade suggestion. Since April 3, following President Trump's tariff announcement, market uncertainty has caused mostly one-way price action. Picking bottoms in markets correcting while uncertainty remains high is dangerous. The stock market recovered from its worst levels of the day.

The chart highlights the significant decline that took SPY to a 481.80 low on April 7, closing at over the 500 level. On April 8, the SPY was at nearly 525 and on April 9 it was back at the 500 level. Buying the 500-520 vertical capp spreads for April 17 expiration while selling the 465 put option for the same expiration at a $5 credit yields a maximum profit of $25 at 520 and above on the SPY on April 17. However, a decline below $460 translates to an unlimited loss on the short put option. The trade yields a $5 profit between 465 and 500 on the SPY on April 17.

The SPY options closed far from those levels on April 7 and were even further away on April 8.

The chart shows that the 500-520 April 17 call spread was around a $9 debit.

Selling the 465 put option at 8.50 made the cost of the trade on April 9 around a $0.50 debit instead of a $5 credit during the height of the April 8 volatility, impacting the trade’s economics, causing the maximum profit to decline to $19.50 with an unlimited loss below the 465 level.

In the heat of the moment, when the market was extremely volatile, the opportunity to execute this trade at a $5 credit was attractive, but it does not work at a $5 debit. I highlight this example for educational purposes and to sensitize traders to the opportunities available when market volatility spikes and distorts prices. 

Flipping the script for those who believe that another test of the April 7 low is on the horizon, another trade idea to capitalize on a short-term recovery that leads to another downside leg in SPY would be:

Buying  April 17 SPY 510-490 vertical bear put spread and selling the April 17 SPY 535 call option for a $4 credit was available on April 8.

The trade had a profit of $4 from 510-535 on the SPY, had a maximum profit of $24 if the SPY is below 490 on April 17, and had an unlimited loss above the 539 level on April 17 on the April 8 prices with the SPY above 525.. On April 9, the economics changed with the vertical 510-490 put spread with selling the 535 call, yielding an over $5 debit, changing the trade’s economics. The trade changed as the SPY dropped below the 500 level. 

The bottom line is that markets are moving dramatically, changing the dynamics of the risk-reward profile of trades. The two trades above were prices when the SPY was near the 480 level on the call spread and near the 525 level on the put spread. The 500 level made both uneconomic, but the market is moving quickly and could return to those levels.  Be extremely careful during the current market uncertainty, as volatility is almost guaranteed to continue. 

Be careful during the current market uncertainty, as volatility is almost guaranteed to continue. 

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