How to trade the S&P 500's march to record highs using options as volatility remains elevated

An analyst anticipates the S&P 500 will retest its all-time high, citing the market's 21% rebound since April and the rapid decline in the VIX from nearly 60 to below 20. The analyst suggests capitalizing on this expected upward movement by implementing a call spread strategy, specifically buying the July 18 $605 SPY call for $8.30 and selling the July 18 $620 SPY call for $2.65, costing investors $5.65 per spread, while acknowledging the influence of the "option-expiration week effect" on large-cap stocks.

Analysis

The analyst presents a strongly bullish case for the S&P 500, anticipating an imminent retest of its all-time high, driven by a significant market rebound where the SPDR S&P 500 ETF Trust (SPY) has surged 21% since its April lows. This recovery followed a period of intense market stress, marked by a nearly 20% drop in the benchmark index and a VIX spike above 50, which the analyst viewed as an overreaction to trade tariff announcements and a prime buying opportunity when SPY traded at $481. The subsequent market stabilization is underscored by the VIX plummeting approximately 65% from a high of 57.96 to below 20 between April 9 and May 12, one of its fastest declines historically, signaling a swift return to stability. The analyst believes current market moves are often exaggerated and projects the S&P 500 Index could test levels above 6,150. This outlook is further supported by the "option-expiration week effect," which may positively influence large-cap stocks, particularly as options expiration coincides with a market closure for Juneteenth. While the VIX is now around 20, making options less expensive, they are not considered cheap, leading to a defined-risk strategy: a July 18 SPY call spread, buying the $605 call for $8.30 and selling the $620 call for $2.65, for a net cost of $5.65 per spread, aiming to capture upside towards SPY's previous all-time high of $613.23.

Key Decisions for Investors

• Investors with a bullish outlook on the S&P 500 may consider a defined-risk call spread strategy, such as the proposed July 18 SPY $605/$620 spread, to participate in a potential melt-up towards or beyond previous all-time highs.
• Monitor the S&P 500 for a potential test of the 6,150 level, as suggested by the analyst, especially considering the 'option-expiration week effect' which could influence large-cap stock performance.
• Recognize that while the VIX has substantially decreased, implying lower option premiums, they are not historically cheap, thus strategies that offset premium costs, like call spreads, warrant consideration for managing risk after the significant market rally since April.