SPY PUT Trade – Loss Taken – The Value Of My Cash Cushion

Over the past 4 days my SPY Put trade has not worked out. The market has rallied each day except for Monday.

As many readers know on Sept 9 2011 I purchased 40 SPY Put contracts for the OCT 22nd options expiry at the strike of $115 for $5.19 for a total cost was $20,817.00 with commission.

The Reason I Put In Play My Spy Put Hedge on Sept 9:

My SPY Put Hedge Cash Cushion up to September 9 contained $56533.00. I felt that with Greek, one year sovereign bonds skyrocketing to 90% and 2 year bonds at 70%, the chance of an event over the weekend was very high which was why I bought more than my usual amount of spy put contracts.

On Monday the market fell further and I sold 10 of my contracts for $6.21, but I held the remaining 30 contracts. On Monday the capital returned was $6190.50.

Below is the chart for the past 5 trading sessions. You can see where I purchased the spy put contracts on Friday Sept 9. On Monday the market sold lower and the ultimate oscillator indicated oversold on the market. I unloaded 10 contracts with the intention that each day I would unload more of my contracts in lots of 10 at a time as the market moved lower.

The chart shows that this did not happen and in fact on both Wednesday and Thursday the Ultimate Oscillator indicated overbought conditions in the market despite the low volume in this current rally. However I stayed in the market with my spy put contracts because each day at the close the market fell. This is a definite sign of a bear market and I hoped the market would pullback making my SPY Put trade profitable.

Spy Put Trade Sep 9 to Sep 15 2011

Spy Put Trade – Importance Of Stop Loss

However I am an investor and I know better than to hold forever when it comes to puts or calls that I have bought and my spy put contracts are no exception.

On Wednesday I put in a stop loss at $4.45 for 10 of my contracts. I was stopped out. Capital returned was $4430.50.

On Thursday I was again stopped out at $3.27 on my remaining 20 contracts. Capital returned was $6508.00

The total loss on my trade was $3688.00. This works out to a loss on the entire trade of 17.71%. If I had not sold 10 of my put contracts on Monday’s decline, the loss would probably have been closer to 22%.

Such a loss shows the value of my building up a cash cushion with my SPY PUT Hedge and the importance of unloading the put contracts throughout the trade both when profitable or if unprofitable.

During the year I buy and sell spy put contracts in order to build up a hedge against market declines. By doing this, I am also preparing for when I will be wrong and buy the spy puts only to find that the market instead of falling further, climbs higher.

I have posted this article to show that even after 35 plus years of trading, I can lose capital as easy as any investor by making a wrong decision. However because I know from experience that I cannot be right all the time when it comes to my spy put hedge, I therefore rely on my cash cushion to “cushion me” for those times when I will be wrong and take losses.

This year to date I have been on the wrong side of my spy put hedge, 6 times. The total loss against my cash cushion has been $6595.50.

This week’s single trade accounted for 56% of those losses.

I know from experience that I will be wrong at times and as the market climbed higher throughout this week I kept using stop losses to force myself to sell my spy put contracts for losses in order to release my capital and prepare for the time to buy back into the SPY Put again, as I do believe the market will fall shortly as this rally appears to be running out of steam. But there is never any point in fighting a trend. The trend was up for most the week and I used the stop losses to force the selling of my spy puts and release my capital to fight another day.

LINKS:

For those wondering about how my SPY Put Hedge works and the concept of my cash cushion, you can read the SPY Put Hedge documentation here:

Understanding Hedge Strategy – Part 1

Understanding Hedge Strategy – Part 2

Understanding Hedge Strategy – Part 3

View The SPY PUT Trades for 2011

View The SPY PUT Trades for 2010

For those interested in knowing more about the SPY ETF itself this link will assist:  Spy Put



  • Drew

    Teddi,

    Sorry about your loss. I had a similar although less painful experience. After seeing the SPX close below 1200 I bought 10 SPY puts on Wed afternoon just as it topped out (BTO 10 SPY $119 @ $4.30). It seemed we had hit the top of the range and we would be heading south again – technicals plus all the macro havoc certainly pointed that way.

    Watching yesterday it never took out my stop and still looked like SPX may head south again. Unusually, even with the lousy US economic numbers it still ended up higher. I sold right at the close for a $515 loss (STC 10 SPY $119 @ $3.82 – well within acceptable limits). Closing over 1205 really suggested we would be up today – which we are right now, not to mention with the VIX lowering, Time Value is decreasing fast.

    I was about to buy some more today like you have however thought about the irrationality of the market and the fact that the Fed will meet in the coming week and we all know how people love to believe in free money from the Fed. I am holding off until either the market hits 1228 and indicators show overbought OR Fed comes out with no QE3. At present, taking advantage of the up days to sell Oct covered calls on my remaining long positions (GE, MSFT, GSK) as the Sept are all expiring out of the money today – oh and really enjoying the naked calls I had on Netflix that will expire about 50% out of the money today :-)

    Good trading to all, Drew.

  • MJ

    Teddi:
    Thanks for sharing the trade and being open with your losses and profits. Unlike other pros who show their profits only, you take the time to explain your rational. I’ve learned a lot from your site and emails and have adopted a similar put buying strategy – however, last week I lost on my SPY puts as well but made up some of it this week by going long using SPY calls.

    Thanks,
    MJ

  • Teddi

    Good for you! I have never had any luck with SPY Calls. You would think after 35 years I could get better at the calls but it just isn’t my forte. The puts though I find much easier primarily because when the market falls, it does so, very quickly making the SPY puts an excellent trade.
    Teddi

  • Teddi

    Hi Drew and thanks for your comment. I think overall I am much better at trading spy puts for the day. Holding them longer just doesn’t work out as well for me except in serious bear declines. While we are in a bear market (I think), there are breathtaking rallies and often just some downside and then it falls off a cliff, then runs back up. It’s tough doing calls and puts in that climate unless I am selling them. That’s much easier than figuring out when to buy puts and then when to sell them. Daily though is so much easier for me. I use the 5 day Simple Moving Average and the Ultimate Oscillator. The two are killer combos for me. I did one earlier this morning and I am holding some spy puts now to see what the end of the day brings.
    Teddi

  • JB

    Teddi,

    I too would like to extend my thanks to you for sharing your winners and your losers with your audience. And I, like many of your followers, have recently gotten into trading options and although the amounts are miniscule (bought a couple of SPY calls, SPY puts and even GLD puts over the last couple of weeks) all turned out profitable.

    Your site is excellent and I enjoy reading it. Thanks again.

  • Teddi

    I appreciate your comments and I am glad you are enjoying my site. There is lots more I am working on and eventually I hope my site contains all my strategies and topics from the past 35 plus years.
    Teddi

  • Drew

    Teddi,

    Sorry about your loss. I had a similar although less painful experience. After seeing the SPX close below 1200 I bought 10 SPY puts on Wed afternoon just as it topped out (BTO 10 SPY $119 @ $4.30). It seemed we had hit the top of the range and we would be heading south again – technicals plus all the macro havoc certainly pointed that way.

    Watching yesterday it never took out my stop and still looked like SPX may head south again. Unusually, even with the lousy US economic numbers it still ended up higher. I sold right at the close for a $515 loss (STC 10 SPY $119 @ $3.82 – well within acceptable limits). Closing over 1205 really suggested we would be up today – which we are right now, not to mention with the VIX lowering, Time Value is decreasing fast.

    I was about to buy some more today like you have however thought about the irrationality of the market and the fact that the Fed will meet in the coming week and we all know how people love to believe in free money from the Fed. I am holding off until either the market hits 1228 and indicators show overbought OR Fed comes out with no QE3. At present, taking advantage of the up days to sell Oct covered calls on my remaining long positions (GE, MSFT, GSK) as the Sept are all expiring out of the money today – oh and really enjoying the naked calls I had on Netflix that will expire about 50% out of the money today :-)

    Good trading to all, Drew.

  • Mj

    Teddi:
    Thanks for sharing the trade and being open with your losses and profits. Unlike other pros who show their profits only, you take the time to explain your rational. I’ve learned a lot from your site and emails and have adopted a similar put buying strategy – however, last week I lost on my SPY puts as well but made up some of it this week by going long using SPY calls.

    Thanks,
    MJ

  • Teddi

    Good for you! I have never had any luck with SPY Calls. You would think after 35 years I could get better at the calls but it just isn’t my forte. The puts though I find much easier primarily because when the market falls, it does so, very quickly making the SPY puts an excellent trade.
    Teddi

  • Teddi

    Hi Drew and thanks for your comment. I think overall I am much better at trading spy puts for the day. Holding them longer just doesn’t work out as well for me except in serious bear declines. While we are in a bear market (I think), there are breathtaking rallies and often just some downside and then it falls off a cliff, then runs back up. It’s tough doing calls and puts in that climate unless I am selling them. That’s much easier than figuring out when to buy puts and then when to sell them. Daily though is so much easier for me. I use the 5 day Simple Moving Average and the Ultimate Oscillator. The two are killer combos for me. I did one earlier this morning and I am holding some spy puts now to see what the end of the day brings.
    Teddi

  • JB

    Teddi,

    I too would like to extend my thanks to you for sharing your winners and your losers with your audience. And I, like many of your followers, have recently gotten into trading options and although the amounts are miniscule (bought a couple of SPY calls, SPY puts and even GLD puts over the last couple of weeks) all turned out profitable.

    Your site is excellent and I enjoy reading it. Thanks again.

  • Teddi

    I appreciate your comments and I am glad you are enjoying my site. There is lots more I am working on and eventually I hope my site contains all my strategies and topics from the past 35 plus years.
    Teddi