Speculative idea: Options on SPDR Portfolio S&P 500 ETF with 100% upside potential

The SPDR Portfolio S&P 500 ETF (SPLG) is a low-cost exchange traded fund (ETF) designed to closely track the performance of the S&P 500 Index, providing investors with broad exposure to the US large-cap equity market segment. Launched on November 8, 2005, SPLG is one of the core ETFs in SPDR Portfolio, a suite of financial instruments designed to provide broad and diversified access to major asset classes.

The S&P 500 Index represents around 80% of the US market, making it a strong indicator of the performance of major US companies. The ETF has a gross expense ratio of just 0.02%. It is managed by SSGA Funds Management Inc. and distributed by State Street Global Advisors Funds Distributors LLC.

The early months of 2025 have been marked by significant turbulence and distress in the US equity market, fuelled by escalating concerns over trade policy and economic growth. The Trump administration's tariffs have spooked investors, sparking fears of a potential economic downturn. The resulting stock sell-off has wiped out a staggering $4 trillion, or more than 8%, in market value from its peak on February 19, 2025. The Nasdaq index is down more than 10% from its December peak.

Analysts expect the S&P 500 to remain under pressure in the coming months due to a confluence of factors:

• Risks of trade war escalation: Trump's threats of additional tariffs have reignited fears of a global trade war. The effective tariff rate is now at its highest level since the 1970s, with potential further increases pushing it back to pre-1950s levels. This rollback of globalization could add as much as $2,000 in costs to US households.
• Slowdown in economic growth: Economic growth forecasts have been revised downwards, reflecting trade policy headwinds. The OECD has lowered its 2025 US GDP forecast from 2.4% to 2.2%, while the Federal Reserve has adjusted its forecast from 2.1% to 1.7%. This weaker outlook poses risks to corporate earnings and investor confidence.
• High market valuations: As of November 2024, the 12-month forward P/E ratio for the S&P 500 stood at 22.2x, well above historical averages. The elevated valuation leaves the market vulnerable to corrections, especially if corporate earnings disappoint or risk premiums rise. By comparison, recent averages for the S&P 500 forward P/E are much lower, with the 5-year average at 19.6, the 10-year average at 18.1 and the 20-year average at 15.8.
• Key economic data risks: Upcoming data releases, including PMI and PCE inflation reports, could further unsettle markets. If these indicators signal rising stagflation risks, investor sentiment could deteriorate further.

However, there are also factors that could help mitigate the negative impact and improve investor sentiment:

• Potential tax cuts: Trump has repeatedly stated his intention to make significant changes to the federal tax system. Congress is already working on legislation to expand the provisions of the Tax Cuts and Jobs Act (TCJA). Proposed measures include reducing the corporate tax rate from 21% to 20% or 15%, eliminating the 15% corporate alternative minimum tax, eliminating or raising the $10,000 cap on state and local tax deductions for individuals, and creating a deduction for auto loan interest.
• Corporate recession fears have eased: Despite market concerns about inflation and tariffs, fewer S&P 500 companies mentioned the recession during their recent earnings calls. According to FactSet, only 13 companies mentioned recession in their Q4 calls, well below the 5-year average of 80 and the 10-year average of 60. This is the lowest number since the first quarter of 2018.
• Earnings resilience: While earnings growth expectations for S&P 500 companies have been revised down by 3.5 percentage points in 2025, they are still projected to grow by 10.5%, according to LSEG. Strong performance in the technology sector, led by companies such as Nvidia, and solid results in the consumer sectors are expected to provide continued momentum for the market.

Thus, while there are positive factors that could boost investor confidence, the overall near-term outlook remains uncertain. Ongoing challenges such as geopolitical tensions, trade risks and slowing economic growth are likely to outweigh potential benefits such as tax reform and earnings resilience. It therefore seems increasingly likely that negative factors will dominate in the short term, keeping markets under pressure and investor sentiment cautious.

How to use the idea

We recommend buying PUT options for SPLG with a strike price of $67.00 and an expiration date of 20/06/2025. The option will cost about $1.75, while one contract will cost $175.0, as options are traded for 100 shares.

The investor will profit if the underlying asset’s price is be lower than the breakeven point* of $65.25 on the expiration date. The lower the price of SPLG declines below this mark, the greater the profit will be. We recommend closing the position when the option price reaches $3.50. In this case, the profit will be 100%.

If the price of the underlying asset is below $67.00 but above $65.25 on the expiration date, the investor will incur a loss, which will be limited. If the price of the underlying asset is above $67.00, the investor will incur a maximum loss of $175.0.

The chart below shows the distribution of gains and losses on the option position depending on the price of SPLG on the expiration date.

Bullish view on the ETF and CALL options

It cannot be ruled out that positive corporate events could lead to an increase in the price of the ETF. If you are bullish on the ETF, you can buy CALL options with a strike price of $68.00 and an expiration date of 20/06/2025. The option will cost around $1.85, while one contract will cost around $185.0.

If the price of the underlying asset is above the breakeven point of $69.85 on the expiration date, the potential profit is infinite.

If the price of the underlying asset is above $68.00 but below $68.85 on the expiration date, the investor will incur a loss, the amount of which will be limited. If the price of the underlying asset is below $68.00, the investor will incur a maximum loss of $185.0.

*The break-even is determined as the sum of the strike and the option price.

The chart below shows the distribution of gains and losses on the option position depending on the price of SPLG on the expiration date.

Important note

Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.

This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.

A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.

Key risks

• A strong earnings report could potentially drive an increase in SPLG's price. In this scenario, PUT options would lose value, while CALL options would gain value.
• Additionally, relatively low volatility in SPLG may cause the options to depreciate by the expiration date.

Want to learn more about how to control the returns and risks of your investments with stock options? Check out the Options Trading course at Freedom24 Academy, which contains practical advice and examples from real investment practice.

*Capital may be at risk. Past investment results do not guarantee future returns.

The ability to provide access to a specific financial instrument depends on the result of a compliance test.

*The information provided is for marketing communications purposes and does not form part of 'investment advice' or 'investment research' services.

**The company may engage in trading the financial instruments mentioned in this material as a counterparty or liquidity provider. However, all recommendations and information provided in this offering are independent and not influenced by the company's trading positions. We take all necessary measures to prevent conflicts of interest and ensure the objectivity of the information provided.