Spy Put And The Importance Of The Split

I wrote a number of articles yesterday (June 24) on the Spy Put Options trade I was involved in. I bought 150 Spy Put Options per the 2013 trades I detailed out here in my Spy Put Options chart for this year. The timing of the purchase was perfect for my strategy but the market direction did not co-operate. Yesterday the market direction plunged lower after I purchased my Spy Put Options but then after two unsuccessful attempts to push lower, investors bought into the market and began to turn the market direction higher. Comments by the Dallas Fed President on how the scaling back of Quantitative Easing would be slow and balanced calm the markets.

Fed Intervention – You Know They Are Watching The Stock Market

Despite what investors read or believe I am a confirmed believer that the FED watches the overall stock market. Yesterday (June 24 2013) was just another example. The market has collapsed since Fed Chairman Bernanke commented about the scaling back of Quantitative Easing. No matter what has happened, the overall direction had turned decidedly lower. Yesterday with the Dow down over 200 points, suddenly a Fed President makes some comments to support stocks? It is so obvious that stocks are manipulated I am surprised there is anyone who believes otherwise. Handling manipulation though is another case itself and the Spy Put Options because they are focused solely on market direction, require special watching to remain profitable.

Spy Put Options Purchase – Great Timing But ….

The timing of my purchase of another 150 Spy Put Options was exactly as it should have been. I waited for a bounce back from the opening gap down panic and bought the puts. The market then began to fall again. Let’s take a look.

A- Opening Gap Down.

B – Bounce back – time to buy the Spy Put Options. I bought 150 Spy Put Options.

C- Market Direction moved lower.

D- Market Direction moved even lower setting another new lower low after the rally following point C failed.

E. A rally after point D failed again and the market direction pushed back to the same low point as point D. Then comments out of the Dallas Fed trickled through the market.

Spy Put Options trades June 24 and June 25 2013

So the timing was great, but there are always mitigating circumstances that you have to be ready for and knowing how to deal with those circumstances is what is important. I wrote an article yesterday during the later afternoon which if you a re a FullyInformed member you can read here. In the article I explained how to spot the reversal in the market direction and to realize that the trade was probably going to turn against me.

Protect and Profit By Splitting Into Groups

When there is a significant change within the market direction but I am unsure whether that change will hold, I always split up my Spy Put Options. For example a few days earlier I had bought 100 Spy Put Options. When the market direction turned down but seemed to stall, I sold half of the positions and then retained the other 50 put positions to see if the market direction would move still lower. This is a great strategy to use when you are unsure of an outcome. It allowed me to capture some of the profits from the trade and at the same time left open the possibility of further profits should the market decide to fall even further, which is what happened. Handling the Spy Put Options this way can often create excellent profit opportunities as the first set earns a certain amount while the second set might earn substantially more should the market direction after stalling, decide to continue to slide.

But it also protects. by selling half of the Spy Put Options I locked in profits which, should the market direction turn back up, may help to eliminate or reduce losses should I need to sell the other half of the Spy Put Options for a loss in the event that the S&P 500 moved higher rather than lower.

June 24 and June 25 – Splitting Up 150 Spy Put Options Contracts

This was the case with the 150 Spy Put Options I bought on June 24. When the second bottom was reached and the market direction began to climb I split the 150 contracts into 3 groups of 50 Spy Put Options contracts each.

In the chart below you can see the actions I took. I sold the first two sets of 50 Spy Put Options contracts as the market direction continue to exhibited lower higher and higher highs. I indicated in my article on both my twitter account (which you can join here) and on the paid members site (which you can join here) that I was holding final 50 Spy Put Options into the next day (June 25).

On June 25 (today) you can see that the market direction opened with a gap up and then a sell lower. I sold my final set of 50 Spy Put Options on the dip in the morning and posted it to twitter and my website. That final 50 Spy Put Options ended with a loss.

Spy Put Options sold June 24 and 25 2013

Turning The Spy Put Options Loss Into A Winner

Still though, because I split up my Spy Put Options into 3 groups of 50 each, I managed to end with less of a loss. The first set of 50 Spy Put Options puts earned $1393.33. The second trade earned just $593.33 and the third trade lost $3006.66. Total income lost was reduced to $1020. Not the greatest trade to be sure but the loss would have been worse if I had not split up the position.

Staying Consistent and Not Second Guessing

The key to this Spy Put Options trade was NOT second guessing the market direction. Once the market tried to break to a new low and failed at point E in the above S&P 500 charts and then market direction began to turn, the strategy became one of selling the groups of Spy Put Options put options as the market rose. Then I set a loss I was willing to take on the remaining 50 Spy Put Options of 50 cents. When I sold the Spy Put Options on the morning of June 25 the loss was 58 cents per Spy Put Options contract. Still, because the entire trade was broken into 3 groups, the trade ended with less of a loss than if I had held all 150 Spy Put Options.

Summary – Not All Are Losing Trades

Splitting up the spy put options contracts does not always mean the part of the trade will end with a loss. The prior trade I spoke of started on June 20 when I bought 100 Spy Put Options contracts. I split the trade when the market direction of the S&P 500 looked like it might recover. The first set of 50 Spy Put Options contracts earned $3892.50. But shortly after, the S&P 500 continued to decline and I held the remaining 50 Spy Put Options puts into Friday June 21 and into Monday June 24, selling them on Monday for a gain of $18642.50. The total gain from this trade then was $22,535.00 which worked out to a return of 99.6% on the invested capital of $22,605.00. Obviously then, splitting up a trade does not always mean lower returns.

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