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SPY PUT Option Trade Holding Over A Weekend (SPDR 500 ETF)

Jun 24, 2012 | SPY ETF Hedge Strategy (SPY)

In 1993 when the SPDR 500 ETF or SPY as it is often referred to, was first introduced, I was using a variety of put options to hedge my portfolio. A lot of investors do not realize that for a great many stocks, options were only introduced in the 1970’s and have grown from there. Up until 1993, it was far more difficult to hedge against corrections, downturns and bear markets. Today everything from SPY PUT OPTIONS to dozens of Bear ETFs can be used by investors to profit and protect from downturns. The SPY PUT Options to profit from downturns changed forever the way I handle protecting my overall portfolio.

Thanks to the SPDR 500 ETF any investor can profit easily through simply purchasing a handful of SPY PUT options when technical timing indicators show weakness in the overall stock markets. In fact I have many friends who do nothing but buy SPY PUTs and SPY CALLs to profit from market direction.

SPY PUT CASH CUSHION

My whole strategy for the SPY PUT hedge is to basically hold spy put options for a day or two and then close them for profits. Through the constant buying and selling of SPY PUT options during periods of weakness I build up the cash amount earned in my SPY PUT Trades. I call this my cash cushion because as it grows with each successful SPY PUT Trade, it increasing protects more of my portfolio. That way as it gets larger I can take a bit more risk with a SPY PUT trade because if it does not work out the size of my cash cushion can absorb a few wrong trades.

That is the reason for this weekend’s SPY PUT Trade. On Thursday I indicated in my market direction outlook that my market timing technical indicators showed a bounce could be expected on Friday which should be followed by more overall selling in the stock market.

Therefore on Friday I watched the S&P 500 index rise and near the close of the day I bought SPY PUT options. I bought my SPY PUT contracts with the SPDR 500 ETF trading around 133.40 late Friday afternoon. I always try to go out 2 months when buying my options in the SPDR 500 ETF as I have found when a trade goes bad two months provides ample time to turn a loss into a profit. To that end I bought 10 of the 18AUG12 SPY PUT Options contracts at the $134 strike for $3.90

Holding Spy Put Options Over Weekends

More than 10 years ago, holding market dependent options such as the SPY PUT was not as volatile as it is now. Today with our global interdependency much can happen over a weekend somewhere in the world and buying spy put options on a Friday to profit from a possible downturn on the following Monday is full of danger. The weekend could see any number of economic events that could turn the market from down to up. Years ago I would buy 30 or 40 spy puts on a Friday to hold over a weekend to profit in the upcoming week. Today I buy no more than 10 spy put contracts unless it is something like the 2008 to 2009 bear market and even in that severe market, holding spy puts over a weekend often  ended with large losses.

The Benefit Of The Cash Cushion

My cash cushion allows me to take this risk. I only do this after my spy put cash cushion has grown enough to not be adversely affected by a SPY PUT Trade that fails to work out on the coming Monday. This is why I trade in and out of the SPY PUT throughout a correction rather than buy spy puts and hold them for weeks as the market gyrate around during corrections. Each time I close a spy put trade the profit is locked in and my cash cushion grows. Within a few spy put trades I am no longer using my capital for the spy put hedge but using the profit I have already made from my spy put trades.

Friday’s S&P 500 Chart – When to Buy Spy Put Contracts

Below is Friday’s S&P 500 stock chart. Remembering that my market direction call on Thursday was for Friday to see the market rise and then for Monday and next week the market to fall, the spy put strategy for Friday then was to buy the spy puts as high as possible. Here is how I determined when to buy my spy put options. I have marked all the indicators in the chart and described them below:

SPY PUT Trade for June 22 2012

The above S&P chart for June 22 2012 shows the indicators I followed to determine my entry point to purchase SPY PUT Contracts to hold over the weekend

A. The S&P 500 gapped up at the open. The low at the open however was 1327.61

B. At 1047 the S&P 500 fell back to the low of 1327.36, pretty much the opening low. I put a marker on this as soon as it happened. If the S&P 500 should rise and then fall back to that low again, I would buy my spy puts on the very next rise. Basically then, I am watching to see if that low of 1327 is going to be tested again. It was not so I can continue to wait to buy my spy put options.

C. From 11:00 AM to 1:30 PM the S&P 500 traded in a very narrow range. It could break to either the upside or the downside. After 1:30 PM the S&P moved to the upside. I can still wait to buy my SPY PUT Options.

D. From 1:30 to 3:00 the S&P continued to make higher lows and higher highs. This means the market had enough strength to rise further so again I can continue to hold off buying the SPY PUTS.

E. At 3:15 PM the S&P recovered to a second peak which hardly broke the 1st peak high. After the first peak the S&P had sold off somewhat but the second rise to point E did not have the strength of the first peak. I bought my 10 spy put contracts as the second peak began to fade.

F. Following my purchase of SPY PUT contracts the S&P fell and then climbed into the close but look how at the close it sold right off to just below where the twin peaks were for the late afternoon. This is a typical lack of conviction on the part of investors.

SPY PUT Options and the Importance Of Thursday’s Sell Off

Thursday’s selloff was not a panic day. The VIX Index reflected no panic on Thursday. For analysts to think that Thursday marked a wash out is I believe premature. I feel that Thursday was more the result of the Greek vote aftermath and the realization that not only is the Fed not pumping in billions more dollars at this point but that actually nothing has changed despite the Greek vote. The Euro mess has no solution still, the G20 meeting resulted in nothing as usual and Bernanke disappointed investors.

All of the above are reasons why I believe Thursday’s low will be revisited this upcoming week and could easily break and see the S&P fall to 1300.

Conjecture Versus Technical Timing Indicators

It is important to remember that this is all a guess on my part and does not represent what the technical timing indicators are saying. The technical timing indicators on Thursday and again on Friday are telling investors that weakness is in the market and more selling lies ahead. They cannot predict how heavy the selling may be or how low the market direction can fall.

My decision to buy spy put contracts is just a hazy crystal ball gaze on my part. However since my belief is that the market direction is down and Friday saw a nice rally and because I already have a very nice SPY PUT Cash cushion to this point, I don’t mind risking a bit of my capital on buying spy puts for Monday.

SPY PUT OPTION LINKS

Internal References

Listing Of SPY PUT Trade Articles

2012 SPY PUT Trades Listing

2011 SPY PUT Trades Listing

2010 SPY PUT Trades Listing

Articles Discussing The Ultimate Oscillator

Understanding SPY PUT Hedge Strategy Part 1
(When I Can Watch The Market During The Day)
Understanding SPY PUT Hedge Strategy Part 2
(When I Am Unable To Watch The Market)
Understanding SPY PUT Hedge Strategy Part 3
(Short version using only ultimate oscillator)

External References

SPY PUT Option Chain
SPY ETF Home Page From State Street Global Advisors (SPDR)

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