By now regular readers know how much I love my Spy Put Hedge trades. Once in a while I get a flurry of emails complaining that my Spy Put Trades are not a hedge but simply a day or swing trade here and there. I guess it all comes down to what you are expecting from your hedge. With my SPY PUT hedge I want protection from pullbacks, increase my cash cushion to help protect against pull backs and earn income while also providing some protection. So to me I think the fact that my cash cushion just keeps getting bigger is the best type of hedge. Many people hedge to protect from losses. But that hedge comes with a price tag and often that tag is a large one. I prefer to use my SPY PUT hedge to pay for itself. I started the SPY PUT hedge in 1993 when the SPDR 500 ETF was first introduced. In 2008 during the market crash, the SPY PUT hedge returned $115,000 in income. At that point I was investing $425,000 in capital. The SPY PUT Hedge provided 27% protection against losses. As I realize that many of my positions were put positions the amount of protection I needed was less than those positions that would be in stocks. This is because put positions can be rolled out or down and out and wait out the plunging market. I think 27% protection is pretty good. For other investors though I realize they are seeking 75% to 100% protection. For that you need to consider a bear ETF or a put buying strategy. But to protect that percentage of stocks will cost a lot of money. I hate throwing money into protection without getting something in return and the SPY PUT provides me something in return.
Spy Put Trades Today
The market volatility today, although not incredibly high,, did rise 9% and the whipsawing of the market provided some excellent entry and exit points. I twittered my trades all day today, which is actually not as easy as it seems while busy trading. But I thought today was a good day for those who have joined me on twitter to follow along and I hope a few joined me with the SPY PUT trades. If you did why not leave a comment below.
Today i did 4 SPY PUT trades in the one day. This is quite unusual for me. Normally I get in 1 trade or perhaps 2 but today I did 4. 1 Was okay, 2 were quite good, 1 was break-even and a fourth was excellent.
The chart below shows the standard tools of the 1 minute SPX time chart and the Ultimate Oscillator set for my favorite periods or 5, 10, 15.
Enough action for 4 SPY PUT trades. An unusual number of trades.
1) The first trade was at the open as the S&P 500 tried to hang on at the open. The overbought signal was flashed and I bought 30 put contracts. I went out to November and bought the $143 spy puts. The reason for using November is because if something dramatic happened and I was unable to close without taking losses, buying that far out gives me weeks to recover and turn any losses into credits or at the least, smaller losses.
2) The second SPY PUT trade happened around noon simply because I saw from the chart, as you can see above, that once the first lowest low was made the market rallied and despite the two strong overbought signals, the S&P continued exhibiting a higher high and higher low. This almost always signals a rally that should continue for a bit longer. By the time I bought the second group, you can see how the Ultimate Oscillator showed two overbought conditions almost side by side. Compare it to the S&P chart above and you can see that there was a topping action with those double tops, so I bought 20 November $143 puts again. The oversold indicator came not long after and I sold out.
3) This was the poorest of the trades as the market did not pull back long enough or deep enough to make any kind of decent profit. I ended up selling my puts for almost a break-even as the S&P 500 started climbing shortly after.
4) Was the final SPY PUT trade and it was fairly decent. It turned out I bought right near the high on the overbought indicator and sold just under an hour later. I did just 20 SPY PUT contracts and again the November $143.
Spy Put Trade Reviewed
I am working on another article for the Members Section of my website that looks at how an investor could repeatedly pick stocks or ETFs for this type of trade and daily aim for just pennies. Done every day an investor could conceivably earn 10 percent a month. For example on the first trade I paid $2.69 for the November $143 puts and bought 30 contracts for a total capital outlay of $8070.00. If an investor had perhaps just $30,000, the SPDR 500 ETF (SPY) is liquid enough that they could easily buy 110 contracts for a total of $29590.00 capital outlay. If the investor sold the puts for .15 cents, this would be $2.84. This is quite possible on the SPY but not every day. This would return $1650.00 before commissions.
But consider if an investor aimed lower. What about just .10 cents which would still earn $1100 and done 5 days a week for 4 weeks, an investor could earn probably about $20,000 before commissions. I bring this up because at my local investing club there are a number of investors who do nothing but these penny type trades on ETFs.
ETFs like the SPY are liquid enough for this type of volume which could assist an investor with a small portfolio to grow it larger. Here is the link to that members only article.