Spy Put Options remains I believe one of the better hedges against market declines but it definitely is not for everyone. SPY Put Options are often the more difficult option play particularly on a day like today, May 30 2012 when the market direction already opens down but fails to recover early. The temptation is to accept the little pushes back up and step into the downturn and try to buy SPY Put Options on a small bounce.
Avoid Temptation With Spy Put Options
You want to avoid that temptation when it comes to buying spy put options unless you are more into gambling than into technical analysis.
Looking at the S&P 500 chart this morning by 10:11 AM, there was no actual push to the upside that was worthy of purchasing SPY Put Options. Unless I had bought them yesterday near the close, like many readers did (and thank you for your emails) I have always found that it is important to wait for the clear signals.
Below is the 1 minute S&P 500 chart. I have marked the pertinent information on the chart.
A) The early morning sell off at the open was probably the best chance to buy SPY Put options but it was less than a minute before the market fell again and the Ultimate Oscillator was flashing oversold still so there was no technical reason to buy spy put options at that point.
B) Unless you are the gambling type, so far this morning B was the best entry-level and a case could be made based on the next little rally which failed to push as high as the first rally that B indeed was a good purchase point. However the Ultimate Oscillator did not reflect overbought and certainly there was no premium in the spy put options other than five cents to be made into the next rally down.
C) I am waiting for a serious push higher which should then create a stronger overbought reading and that will be the time to buy spy put options.
Spy Put Options And Ultimate Oscillator Readings
The chart below shows this morning until 10:11 AM. I have again marked all the important events.
A) Market opened down. There was only a fleeting moment at 9:31 (A) which lasted barely half a second.
B) The first possible chance for gamblers but unless the market is going to tank from here the earnings will only be around five cents or so.
C) I need a serious push back up to around 1322 to get strong overbought readings. 1322 is the same level as A
D) The Ultimate Oscillator shows the strong oversold reading right from the open. That reading though stayed until 9:42 AM so there was no technical reason to buy SPY Put Options at the open. The oversold reading tells me stay way and avoid temptation of buying spy put options too early.
E) This point at 9:55 AM was the only little rally of any size this morning. But there is no strong overbought indication from the Ultimate Oscillator. Buy Spy Put Options at this level could be a mistake. Indeed when I watched the spy put options as the S&P 500 fell back further, the spy put options increased by around five to ten cents.
F) I added momentum to my Spy Put Hedge trade today because the market opened lower and refused to push back up. Momentum is great to add at this point and I use the 14 period which is standard with momentum. You can see that F corresponds with B. Then when the S&P 500 fell back after rising to point B, momentum did not. This shows that there is enough momentum to stall the selling for that moment. I therefore wait to see if the market cannot push higher.
Patience Is Needed When Trading The Spy Put Options
Remember that patience is a key part when using the spy put options to profit from a big gap down such as today. Those readers who emailed me that they had bought spy put options at the close yesterday are to be congratulated. However for me I am always unwilling to use the spy put options for anything more than hedging. For hedging then I want clear overbought and oversold signals to base my entry and exit decisions upon. The decision to buy spy puts yesterday by many readers must hinge on their belief that the market was going to fall apart after yesterday’s rally and based on historic analysis, there was a lot of reason to believe that to be true.