Long vs. Short Trading Strategies For S&P 500


Simpler Trading Team

Mar 21st 2022  .  4 min read

Simpler’s traders understand that when the market is facing bad news, market events, and volatility, their primary job is to follow asset prices rather than make predictions.

Monday was a prime example for not trying to outfox the market. The session started a bit up-and-down, then swiftly turned negative by midday.

The Dow closed at 34,552.99 points to fall .58% (dropping 201.94 points on the day). The Nasdaq dropped to 12,792.99 points for a .73% tumble while the S&P 500 lost .29% to 4,450.05 points.

(Check out the free video, above, for insight into trading this changing market.)

Finding trading strategies for S&P 500

There is no crystal ball in the trading toolbox, nor will there ever be. However, when traders look into market conditions that repeat over time, they are better able to determine a roadmap for trading strategies.

Simpler’s traders regularly turn to the S&P 500, one of the three major indexes. The S&P tracks the performance of 500 large companies listed on stock exchanges in the United States. 

Following a bit of upside last week and now heavy volatility, the question remains, “Does the S&P 500 have the energy to make a reversal sooner rather than later?”

The S&P 500 is a key equity index traders use to gauge the broader market. Last week the market had triple witching expirations that wrapped up stock options, stock index futures, and stock index options contracts on the same trading day.

Triple witching options expiration

Triple witching happens four times a year – the third Friday of March, June, September, and December. 

With three options classes that share the same expiration on the same day, the market historically encounters increased trading volume and volatility.

The options market has nuanced tendencies during these points in time where rallies precede expirations. There was a rally in the market into the end of last week from the puts that had been opened just prior to the global economic situation. 

Participants in the market were short, a trading position they opened by borrowing shares they believed would decrease in value. The market then rallied.

When the short duration S&P 500 put options expired, this opened the door for some downdraft as traders face the final weeks of March. (Put options let traders sell assets at a set price on or before a set date.)

With hedging expired, volatility tends to be common following witching dates. Volatility in the market following expiration occurred this past January and prior years as well. The opening session Monday appeared to repeat history.

Predicting market invites risk

When traders attempt to predict what is going to happen in the broader market in the midst of volatility, they invite more risk to their trading strategies. In a market such as this, it would be better for traders to follow asset prices to see what’s happening rather than to hang their predictions and subsequent strategies out to dry.

Simpler’s traders have viable ideas for trades into the end of the month and are watching for key levels of confirmation to manage risk vs. reward as the first quarter closes.

Witching expirations followed by weakness in the following market sessions keeps Simpler’s traders focused on the 21 exponential moving average (EMA) to see if the level holds or if it makes a hook higher.

If support holds, the team watches closely as options in the S&P 500 expire on March 31. The quarterly expiration may present opportunities, such as a butterfly spread.

Butterfly spread balances risk vs. reward

A few different ways to strategize a butterfly spread exist for the upcoming expirations. This options strategy combines both bull and bear spreads that come with a fixed risk and capped profits and losses. These options spreads pay more if the stock or asset price doesn’t move before the option expires.

Butterfly spreads, using four options and three different strike prices, offer opportunity to put risk vs.reward in a trader’s favor in a market environment with continuing volatility.

This is why Simpler’s traders count butterfly spreads among their favorite strategies when the market gets choppy and unpredictable.