SPY PUT Hedge Returns With Winning Trade

Mar 25, 2013 | SPY ETF Hedge Strategy (SPY)

The Spy Put Options are my method of hedging. It has been this way since 1993 when the SPY ETF was first introduced. This Spy Put Options Hedge is wonderful for those weak days when the bull market is either correcting, consolidating, taking a rest or simply weak. To use the Spy Put Options is simple and the more an investor uses it the better they should become at timing their Spy Put Options trades.

Spy Put Options Clue – Market Direction Outlook

The first clue for those who want to build up a nice big cash cushion for that time when the market direction will actually collapse is to review the market direction outlook the night before. For example, on the weekend, I wrote that the market direction technical indicators clearly showed that the market weakness was building, but as I indicated, “We could therefore see a shot higher out of the open on Monday and then a pull back to close unchanged or to the downside on Monday“.

The key then is to first understand that we are in a bull market. Any pullback is your clue to do a quick Spy Put Options trade. So stop worrying that this bull market will end tomorrow with huge collapses. That is not in the cards at the present. Someday the market direction will turn down but it is not today. To do that you are looking for the market to rise and then stall out. This morning was just another perfect and classic example.

Market Direction Morning Rise

Just as expected, the news out of Europe buoyed investors and they were back buying. I set up the S&P 500 chart for 5 minute time frame and look for the overbought indicator in the Ultimate Oscillator. The Ultimate Oscillator flashed overbought within 15 minutes of the open and climbed from there. Then it is a matter of waiting for the market direction to show signs of weakness. It came around 10:15 and by 10:20 I was buying 60 of my Spy Put Options.

You are never going to be right all the time but the trend is definitely weak now so even if I was wrong at the outset my losses will be small as I close if the direction changes higher and my Spy Put Options lose .15 to .20 cents in value. That’s when I close and often I will close half my position and continue for another .15 cent loss on the remaining half just in case the market direction changes and I had bought the Spy Put Options just too early but I was right and the direction is lower.

At the same time the 5 minute chart on the S&P 500 eliminates a lot of the “inbetween noise” from the 1 minute chart. I show below the Ultimate Oscillator settings I use.

Spy Put Options Trade March 25 2013 - S&P 500 5 minute time frame

Spy Put Options and the SPY ETF Chart

Keep the Spy ETF open as well and watch for the same indicators. They are sometimes not as strong because the SPY ETF though it follows the S&P 500, is actually indicating the investors on the SPY not the S&P 500. You must therefore review the S&P 500 for this type of trading to spot clearly the overbought and oversold indicators.

The Spy ETF set for 5 minutes to match the SPX for my Spy Put Options trade

Spy Put Options Trade

I bought my Spy Put Options at 10:19 AM with the Spy Put Options at 156.16. I bought 60 Spy Put Options $155 strike April 5 expiry (about 2 weeks) and paid .86 cents.

I sold after the big drop just ahortly after 11:00. At 11:23 I sold with the Spy Put Options at $154.84 and received $1.48. I obviously sold too early but that is not the point of the Spy Put Options Hedge. I am using the strategy to build a cash cushion which should the market take a larger tumble during the year will hedge my portfolio against large losses.

Spy Put Options Sell

Once the oversold indicator was signaled I basically wait for the market direction to shift either to up, sideways or further down. If it shifts higher and keeps climbing I then sell my puts. Today it moved more sideways than up and then plunged for about 4 minutes just shortly after 11:00 AM. I thought that might be the bottom and the oversold indicator was already done from the Ultimate Oscillator so I sold.

Total profit from the trade was .62 cents = $3720.00 before commissions are taken into account.

So far this is my best Spy Put Options trade this year.