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SPDR 500 ETF (SPY) Call Options Profit Thanks To Market Timing Indicators

Jun 12, 2012 | SPY ETF Hedge Strategy (SPY)

The SPDR 500 ETF or SPY as it is referred to by most investors is my choice for my favorite hedge, the SPY PUT. While I am rarely found trading the Spy Call Options, once in a while there is an opportunity to profit from the SPY Call Options which is what happened today.

Let me explain how I came to buy the SPDR 500 ETF Call options today. I changed the settings on the SPX chart to 5 minutes increments and left the Ultimate Oscillator settings alone. I did this because the market rather than opening lower, opened neutral with no clear direction. By moving to 5 minutes increments the SPX would not whipsaw my position in the SPDR 500 ETF calls as much.

SPY PUTS Were Actually My Intention

I thought the stock market might try to climb and I was waiting for the Ultimate Oscillator to provide me with an overbought reading. However instead the market rose slightly and then began to fall. I figured I had missed the rise in the S&P and thought the day was finished as my SPY PUTS would not be purchased.

SPDR 500 ETF

The S&P 500 chart for June 12 2012 shows the times when I bought and sold SPY Calls in the SPDR 500 ETF. The afternoon trend higher is marked. This trend made it easy to decide against purchasing SPY Calls when I finally received another extremely overbought reading in the afternoon.

Instead by 10:00 AM the S&P 500 seemed to make a bottom which surprised me. Remembering that my market timing indicators on Friday had pointed to a market direction up call, I wondered if the market might turn here and move higher. The rate of change indicator on Monday night had continued to climb from Friday and I knew it had been up since Thursday after giving a short-term buy signal on Thursday.

The fast stochastic and slow stochastic had both given solid market up signals on Friday. I was not surprised when all the news about Spain’s banks plunged stocks on Monday, but normally the readings that I received on Friday are built on strength so I wondered if the market would rally back from Monday’s loss.

I decided I would buy 20 SPY Call Options towards the end of the oversold reading. Around 10:35 I bought my 20 SPY CALL Options in the SPDR 500 ETF. The trade ended up being for only about an hour. I saw the overbought reading from the Ultimate Oscillator around 11:30 AM and sold my SPY Call Options.

After selling my SPY CALL Options I watched the SPX for additional extreme readings including extreme overbought readings. But after a little bit of selling, the S&P moved higher and as you can see from my chart above the S&P was in an uptrend. I doubted though that the uptrend could move much, what with the Greek vote coming up. But the ultimate oscillator gave only one additional extreme reading of overbought around 2:40 PM and with the market direction already trending higher I was unsure whether or not the market would pull back far enough to make that trade profitable. I contented myself with the one trade and stayed away from the SPDR 500 ETF for the remainder of the day.

SPDR 500 ETF Options Summary

This is just a short article which I wanted to share. Most readers know that the SPY PUT is my portfolio hedge preference. It had been this way since the SPDR 500 ETF was introduced back in 1993. But once in a while timing pays off and I can do the SPY Call side as well. While certainly rare for me, it was fun to do this trade and add the proceeds to my SPY PUT cash cushion for 2012.

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