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The major stock indices have been teasing investors this week by hinting that, after a three-month breather, they may finally be ready to resume the massive spring rally. Both the

Dow Jones Industrial Average

and the

Nasdaq Composite

have taken out the July high and now stand at their best levels in more than 14 months.

Many market watchers felt that a new-high close would bring in fresh buying and spark further gains. But so far there has been little follow-through and gains haven't been extended. And while the

S&P 500

is flirting with old highs, it hasn't delivered the much-anticipated 1015 close.

"This is similar to two weeks ago when the S&P hit 960 and everyone felt the trading range would be resolved to the downside and expected an additional 5% to 10% decline," said Doug Pontirelli, a trader with KPN Asset Management, a New York-based firm. "Instead, the market held and now we are knocking at the high end. There seems to be a real paradox out there -- while most people are bullish, as evidenced by sentiment indictors, there is still a good deal of skepticism." He points to the relatively low volume and penchant for profit protection as examples of investors' lack of commitment.

Ready to Join the Party?

"Until the S&P closes above 1015, I still consider us bound by the

trading range," said Kevin Doyle, market strategist with Black Diamond Investors, a Connecticut-based hedge fund. "Until we get that all-clear signal, people will be reluctant to buy at a level that may prove to be the top."

Even though the S&P hasn't officially broken out yet, I think it's hinting -- through expanding breadth, positive reaction to good economic data and the ability to remain firm in the face of external distractions -- that it's ready to join the Dow and Nasdaq and make the new-high party a threesome.

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Taking a Stand in No-Man's Land

An obstacle to buying the S&P now is that buying near the high could prove to be extremely nerve-wracking. Every downtick will result in second-guessing about possibly being wrong. And it would be delusional to assume the market will just run straight up from your purchase point.

One simple solution might be to employ a simple vertical call spread. But this means incurring the net debit cost and limiting the profit potential; I want to be outright long if the S&P closes above 1015.

One possible strategy is a variation on a synthetic long position. A synthetic long is the simultaneous purchase of a call and sale of a put with the

same strike price and expiration day

. The risk/reward and profit/loss profile of a synthetic long is the same as being outright long the underlying stock or index. I'd suggest purchasing a call and selling a put with


strike prices.

With the SPX trading at 1002, you can buy the September 1015 call for $12 and sell the September 990 put for $13 for a small net credit.

I'm not sure there's an official name for this position (write in if you know or have suggestions), but here's why I like it: There is little initial cost outlay because selling the put pays for the purchase of the call; the delta starts at 0.65 and quickly approaches 0.90 as the S&P trades above 1015 (essentially equal to being outright long the index); and most importantly, the position's break-even point on the downside is 990, or a full 1% below current levels. If the index is between 990 and 1015, both options will expire worthless, making the trade a wash. I call this area "no-man's land."

This means that even if the index falls 10 points, you wouldn't incur a loss. Having this cushion is crucial to maintaining the position and your sanity, because you won't need to hold your finger on the eject button every time the market dips on some rumor or sell program.

If you're slightly more bullish, you can buy the 1005 call and sell the 990 for a debit of around $5. This would bring your initial delta to around 0.75 and closer to a true synthetic long (delta of 0.90 or more), once the index trades above 1005. In this case, no-man's land is both smaller -- 990 to 1005 -- and costlier, because any expiration price below 1010 will result in a loss.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.