Riding US Exceptionalism to 2025 with Long SPY & Protective Puts
Size begets size. Records are being shattered. US Exchange Traded Funds (ETFs) have attracted >USD 1 trillion inflows YTD 2024 for the first time in history. Pro-business policies under President-elect Donald Trump continues to entice investors into US equities.
US stocks are at record levels. Is that a concern? Yes. But, unlike other rallies which tend to be concentrated and narrow, this rally has been broad. Gains are visible across industries & segments.
The “Trump Bump” has sent S&P 500 above 6,000 for the first time in history. It has attracted additional USD 140 billion of funds into US equities since US elections. Trump’s agenda promise – pro-growth policies, lighter regulations, & lower taxes continue to keep US equities buoyant.
The risk of a fall gets elevated when soaring at heights. Long position in US equities pose risks. Among many alternatives, protective puts using CME Micro E-Mini S&P 500 options is compelling given sanguine implied volatility expectations.
US EQUITIES EXPECTED TO DELIVER SUPERIOR EARNINGS
In the short term, markets are a voting machine. In the long run, they are weighing machines. Regardless of which machine it is, US equities remain unrivalled now. Momentum and fundamentals both favour a long positioning in US stocks.
Stock markets value growth in earnings and profitability. US firms continue to deliver superbly on both. Earnings have risen strong and expected to expand even stronger in 2025. US firms as represented by S&P500 stocks are expected to clock 14.8% in EPS growth (compared to 9.8% in 2024). In sharp contrast, the MSCI AC World ex-US is estimated to deliver 10.8% in EPS growth.
ARE US EQUITIES OVERVALUED?
Ramping up investments or buying into equities when valuations are soaring can give cold feet to any investor. Are we in bubble territory? Perhaps.
The S&P 500 and Nasdaq are at record highs. But it is not without justification. Rising earnings, promise of artificial intelligence, and American Exceptionalism unleashes the animal spirits.
For now, will the bubble pop? Perhaps not yet.
Instead, the bubble may continue to grow in 2025. Timing the markets is hard. Timing a bubble pop is harder still. During such times, investors must navigate markets prudently with adequate risk guardrails.
Significant capex is being poured into Gen AI investments. If commensurate results are not spectacular enough, stock prices could correct sharply to reflect that disappointment.
US EQUITIES ARE EXPENSIVE. BUY THEM ANYWAY IS WHAT ANALYSTS ARE SAYING.
TINA is back in action. TINA stands for “There Is No Alternative.” Where else in the world, apart from the US, is an economy that is large enough, safe, resilient, and offers the greatest upside to growth. No where else. That is American exceptionalism.
Solid earnings growth expectations, rising productivity, consumers in good health, pro-business policy expectations, and light touch regulations collectively contribute to analysts’ overweight rating on the US equities. Fund flows into ETFs vindicates market expectations.
US equities are expensive. It may get even more expensive in 2025. WSJ reported recently that 12-month forward P/E ratios are at 22.3x earnings.
S&P 500 forecasts for end of 2025 remain vastly bullish ranging from 6400 to 7000. In sharp contrast, Peter Berezin of BCA Research expects sharp correction with S&P falling to as low as 4100 by end of 2025.
FEAR GUAGE REMAINS SANGUINE
Rising asset prices are typically accompanied by elevated implied volatility levels pointing to mounting cost of securing downside protection. Intriguingly that is not the case for US equities for now. The Wall Street Fear Index – the VIX – hovers around multiyear lows.
HYPOTHETICAL PORTFOLIO HEDGING SETUP
Driven by American Exceptionalism, Earnings Growth Expectations, and the Promise of AI, US equities remain compelling. Risk hits hardest when one least expects it. Securing downside protection when it is cheap is what astute investors do.
This paper illustrates method for hedging US equities portfolio represented by 50 units of SPDR S&P 500 ETF Trust holdings (SPY).
For simplicity, this paper assumes that a portfolio manager acquires 50 SPY units at the closing price as of 6th Dec 2024 paying USD 608 per unit valuing the portfolio at USD 30,400. The manager is willing to accept a 5% drawdown and seeks protection for price corrections below.
In this case investors can utilize a protective put, which is an options strategy where an investor buys a put option while holding the underlying asset. It acts as insurance, limiting potential losses if the asset's price drops.
Portfolio manager buys protective put options using CME Micro E-Mini S&P 500 Options (Micro S&P Options) to hedge downside risk. Deploying CME Micro S&P Options expiring on 20th Jun 2025, the portfolio manager buys protective puts at a strike of 5,850 which corresponds to approximately 5% below the underlying futures trading at 6,165 points.
Based on the closing price on Dec 6, the portfolio manager will have to pay a premium of 124 points (USD 620 = USD 5/index point x 124 index points) for one lot of Micro S&P Options to protect a portfolio of USD 30,400.
The pay-off for the portfolio manager under various S&P 500 levels as of 20th Jun 2025 are illustrated below:
This non-linearity in pay-off enables portfolio managers to limit downside even as they can continue to participate in the upside.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
US stocks are at record levels. Is that a concern? Yes. But, unlike other rallies which tend to be concentrated and narrow, this rally has been broad. Gains are visible across industries & segments.
The “Trump Bump” has sent S&P 500 above 6,000 for the first time in history. It has attracted additional USD 140 billion of funds into US equities since US elections. Trump’s agenda promise – pro-growth policies, lighter regulations, & lower taxes continue to keep US equities buoyant.
The risk of a fall gets elevated when soaring at heights. Long position in US equities pose risks. Among many alternatives, protective puts using CME Micro E-Mini S&P 500 options is compelling given sanguine implied volatility expectations.
US EQUITIES EXPECTED TO DELIVER SUPERIOR EARNINGS
In the short term, markets are a voting machine. In the long run, they are weighing machines. Regardless of which machine it is, US equities remain unrivalled now. Momentum and fundamentals both favour a long positioning in US stocks.
Stock markets value growth in earnings and profitability. US firms continue to deliver superbly on both. Earnings have risen strong and expected to expand even stronger in 2025. US firms as represented by S&P500 stocks are expected to clock 14.8% in EPS growth (compared to 9.8% in 2024). In sharp contrast, the MSCI AC World ex-US is estimated to deliver 10.8% in EPS growth.
ARE US EQUITIES OVERVALUED?
Ramping up investments or buying into equities when valuations are soaring can give cold feet to any investor. Are we in bubble territory? Perhaps.
The S&P 500 and Nasdaq are at record highs. But it is not without justification. Rising earnings, promise of artificial intelligence, and American Exceptionalism unleashes the animal spirits.
For now, will the bubble pop? Perhaps not yet.
Instead, the bubble may continue to grow in 2025. Timing the markets is hard. Timing a bubble pop is harder still. During such times, investors must navigate markets prudently with adequate risk guardrails.
Significant capex is being poured into Gen AI investments. If commensurate results are not spectacular enough, stock prices could correct sharply to reflect that disappointment.
US EQUITIES ARE EXPENSIVE. BUY THEM ANYWAY IS WHAT ANALYSTS ARE SAYING.
TINA is back in action. TINA stands for “There Is No Alternative.” Where else in the world, apart from the US, is an economy that is large enough, safe, resilient, and offers the greatest upside to growth. No where else. That is American exceptionalism.
Solid earnings growth expectations, rising productivity, consumers in good health, pro-business policy expectations, and light touch regulations collectively contribute to analysts’ overweight rating on the US equities. Fund flows into ETFs vindicates market expectations.
US equities are expensive. It may get even more expensive in 2025. WSJ reported recently that 12-month forward P/E ratios are at 22.3x earnings.
S&P 500 forecasts for end of 2025 remain vastly bullish ranging from 6400 to 7000. In sharp contrast, Peter Berezin of BCA Research expects sharp correction with S&P falling to as low as 4100 by end of 2025.
Source: The Street
FEAR GUAGE REMAINS SANGUINE
Rising asset prices are typically accompanied by elevated implied volatility levels pointing to mounting cost of securing downside protection. Intriguingly that is not the case for US equities for now. The Wall Street Fear Index – the VIX – hovers around multiyear lows.
HYPOTHETICAL PORTFOLIO HEDGING SETUP
Driven by American Exceptionalism, Earnings Growth Expectations, and the Promise of AI, US equities remain compelling. Risk hits hardest when one least expects it. Securing downside protection when it is cheap is what astute investors do.
This paper illustrates method for hedging US equities portfolio represented by 50 units of SPDR S&P 500 ETF Trust holdings (SPY).
For simplicity, this paper assumes that a portfolio manager acquires 50 SPY units at the closing price as of 6th Dec 2024 paying USD 608 per unit valuing the portfolio at USD 30,400. The manager is willing to accept a 5% drawdown and seeks protection for price corrections below.
In this case investors can utilize a protective put, which is an options strategy where an investor buys a put option while holding the underlying asset. It acts as insurance, limiting potential losses if the asset's price drops.
Portfolio manager buys protective put options using CME Micro E-Mini S&P 500 Options (Micro S&P Options) to hedge downside risk. Deploying CME Micro S&P Options expiring on 20th Jun 2025, the portfolio manager buys protective puts at a strike of 5,850 which corresponds to approximately 5% below the underlying futures trading at 6,165 points.
Based on the closing price on Dec 6, the portfolio manager will have to pay a premium of 124 points (USD 620 = USD 5/index point x 124 index points) for one lot of Micro S&P Options to protect a portfolio of USD 30,400.
The pay-off for the portfolio manager under various S&P 500 levels as of 20th Jun 2025 are illustrated below:
*Put options gain in value when the index drops below the strike price. If index remains above the strike levels, the maximum loss from put options are limited to the premium.
This non-linearity in pay-off enables portfolio managers to limit downside even as they can continue to participate in the upside.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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