Khouw thinks investors who are concerned the market might trade lower in May should consider selling the July 245 call for $1.35 against the long stock position. Additionally, they should buy the July 230 put for $2.50.
The total cost of the hedge would be $1.15 and it would break even at $228.85 or 4.17 percent below the closing price on Friday. If SPDR S&P 500 ETF Trust trades higher, the selling price would be capped to $243.85 or 2.11 percent above the current market price. Khouw added SPDR S&P 500 ETF Trust pays a dividend, so the hedge is practically free.
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