Taking a speculative approach to the potential breakdown of price levels for the S&P 500 can be done using controlled risk. In addition, you can establish excellent reward potential if the trade vehicle used for the shorting of the S&P 500 is that of SDS!
ProShares UltraShort S&P 500 (SDS) - Get Report attempts to mimic Twice the Inverse daily move of the S&P. In "english" that means for each price move of the S&P 500, SDS moves in the opposite direction of that price direction at twice the differential of that move. Thus SDS as well as this trade is not for the faint of heart, children under age, and those who are bullish on the prospects for the S&P 500 over the life of this trade! Still with us?!? Good! SDS options offer excellent liquidity as well as tight markets. That is first and foremost as per the critical variables we want to see in any options trade.
One anomaly that I think exists from time to time if not often is that this type of ETF has a skew to that of its downside, which of course would be an upside skew of sorts as per a sort of built-in/ upside potential for the S&P 500 it attempts to mimic but inversely, of course. Thus, call spreads in SDS tend to be much "cheaper" than those of your standard bullishly-biased equity spreads (i.e., spreads on common stock). That is a bonus when playing SDS from the long side as per where risk is concerned!
Let's take a look at the T3/OP video with Jill and Scott and review the fundamentals and technicals of the overall market and SDS in particular.
Consider a vertical call spread in SDS, a controlled risk combination that will profit from a further fall in the S&P. Should the technical levels of the S&P get seriously tested if not altogether "taken out", SDS as well as this call spread will profit nicely.
This trade is one with medium risk because of the bearish bias of the trade. Given the fact that the market has been hit with very unusual and powerful selling up to this point, it remains to be seen if there is more downside pressure yet to come. This trade is one with medium reward because it is a hedged trade, a combination that has its reward potential "capped" due to the hedge in place (i.e., the short side of the spread). Should technical levels on the S&P be broken, this combination trade could see a monetary profit of approximately one to three times more relative to the risk taken.
Trades: Buy to open 5 SDS December 26 calls for $3.80 and sell to open 5 SDS December 31 calls at $2.50.
The total risk for the trade is the premium paid, or $650.
As always I will monitor the trade on this site in the "comments" section below.