Uptrend and downtrend outlook

Data source: Barchart.com

The chart above has both an obvious uptrend and downtrend. Recent activity could be debated as to whether the downtrend is being broken (bullish outlook) or if the current move higher is a small rebound in what is a sustained downtrend (bearish outlook). Using pricing from 21 March 2025, we explore using S&P/ASX 200 options to trade either outlook. 

Bullish timing outlook

All option trades should start with a price and timing outlook for the underlying market. One bullish outlook may expect the S&P/ASX 200 to revisit the 8600 level in the next couple of months. Starting with that target price we looked at April and May contracts to see if a spread trade could be initiated based on that outlook using options.

The S&P/ASX 200 closed at 7931.23, which is far enough out of the money that the May 8600 Call could only bring in 10.00 points. This low credit eliminates using a vertical spread to trade this outlook. An alternative involves selling the May 7950 Put for 145.00, buying the May 7750 Put for 85.00 and using some of the credit received from this to purchase the May 8200 Call for 45.00. The net result for this trade is a credit of 15.00 points and a payout on 15 May expiration demonstrated on the payout diagram below. 

Data sources: Bloomberg and Author calculations

The break-even level for this trade is less than four points higher than where the index was when the options were priced. Above 7,950 through 8,200 the trade profit at expiration is equal to the 15.00-point credit taken in when the trade was initiated. Beyond 8,200 the potential trade profit is equal to the index level at settlement minus 8,200 plus the 15.00-point credit. For example, if the index rebounds back to 8,600 the potential profit would be 415.00 points.

A trade that is not usually considered bullish is the iron condor. Typically, iron condors are traded based on a neutral outlook. However, if the strikes are positioned higher than where the underlying is trading it can be bullish. For a bullish iron condor, April options are used, and the put strikes are based on the 2025 low selling the April 7,800 Put for 55.00 and the April 7,700 Put purchased for 40.00 taking in a credit of 15.00 points. The spread could be completed by selling an April 8,200 Call for 18.00 and purchasing the April 8,300 Call for 8.00, resulting in a total credit of 25.00 points. The potential payout at April expiration appears below. 

Data sources: Bloomberg and Author calculations

There is a 1.6% buffer to the downside and if the index does not rise more than 3.4%, the potential trade profit equals the 25.00 credit. A drop of 2.9% or more or a rally of 4.6% or more results in a loss of 75.00 points. As noted, the 8600 strikes have no premium due to being very far out of the money, so the 8,200 strike was used in this case. An alternative to this trade is selling the put spread side and if the index starts to move higher, consider initiating the call side of the iron condor at a higher price level. 

Bearish trade consideration

A bearish trade in the S&P / ASX 200 would likely target a lower price than the 2025 low of 7,800. One consideration is a 20% drop from the high which is often a level considered a bear market. The closest strike to a 20% drop from the high is 6,900.

A target of 6,900 is about a 13% drop from current levels so longer dated options are used to trade this outlook. The June 6,900 Put could be sold for 25.00 and June 8,000 Put purchased for 205.00. Based on these prices, selling 2 June 6,900 Puts will bring in 50.00 points and when combined with buying the 8,000 Put for 205.00 results in a potential cost of 155.00 and the payoff on the diagram below. 

Data sources: Bloomberg and Author calculations

This trade profits when the index tracks between 1.1% and 24.9% lower than current levels with the best-case scenario placing the S&P / ASX 200 at 6,900 at expiration netting a profit of 945.00 points. The risk is a drop of more than 24.9% which will result in losses based on being short two puts versus owning one. Recall, 6,900 is down 20% from the all-time high. This is a price level that usually attracts buyers into a market so it is a price level that should offer an opportunity to exit with a profit.