Spy Put Options Trade And How To Handle Closing For A Loss

Yesterday I purchased spy put options near the end of the day to hedge my portfolio for what I believe could be another down day. I wrote an article about the spy put options trade which you can read here. In the article I explained how holding spy put options overnight can result in unexpected losses. It’s important when holding spy put options from the previous day to watch the open but to wait about half an hour to determine the day’s market direction. It is also important to be aware of the reasons for any significant change in the market as these reasons may last longer than a day or may fade during the day allowing for another spy put trade to be instigated.

SPY PUT OPTIONS Loss Caused By Durable Goods

Just as I indicated in yesterday’s article, a news event spiked the market at the open. Durable goods report came in better than expected and the stock market opened higher.

Added to this investor hope that Thursday meeting of European leaders will resolve the European Debt Crisis and it was enough to push the market direction up. I must say personally I see little chance of Germany agreeing to Eurobonds and no chance for any kind of Debt Crisis management that can even come close to resolving the issue. Europe is not a single nation but independent entities that have never managed to resolve anything in hundreds of years of history. To think they can solve this problem is I believe, fantasy.

Nonetheless my spy put option trade needed to be closed.

Closing The Spy Put Option Trade

To close a spy put trade that will not work out today, requires a bit of market awareness. The overall market direction is still down both mid-term and short-term. Therefore a gap up open like we experienced this morning will almost always result in a little back testing. You can see in the chart below this morning’s back testing. That’s the clue to sell my spy put options for a small loss. The image below is a screen shot of the SPX from my active trader platform with TD Waterhouse. I always add momentum to my daily charts just to keep an eye on the movement of the underlying security. In this case you can see the spike up in momentum at the open and then momentum plunged and the SPX pulled back. I waited a little bit to be sure that momentum wasn’t going to fall away which would have questioned the morning’s jump up. It didn’t happen and the market moved back up. That when I sold my spy put options for a small loss.


Closing my spy put options trade from last night for a loss requires a little bit of work.


A. Stock market opened with a gap up. NO point in selling the spy put options to close them right here unless you can do it for no loss.

B. Momentum shows the big spike open

C. Momentum falls off quickly after the open so I know the market will fall.

D. Momentum flattens out and turns up slightly. That’s probably going to be the low for the day and I put in my offer to sell my SPY PUT Contracts from last night.

E. Stock market begins a climb marked by the first green candle after the bottoming.

F. I am filled as the market climbs back up.

By taking my time and closing my spy put trade carefully the loss is only $149.00. Closing the Spy Put Trade makes a lot of sense since the S&P is obviously going to be pushed higher. I will be a lot more interested in buying the spy put options again if the S&P today can reach 1334 or even 1335.

Spy Put Options And Investor Sentiment

Investor sentiment tends to always try to look for the silver lining. Overall investors do not want to see the stock market fall. Investors are as a whole fairly optimistic which is understandable since investing in risky assets requires a degree of optimism. A durable goods order such as this morning’s is all it takes to get investors excited enough to push some stocks up. When buying spy put options it is important to understand that you are always holding an option trade that is contrary to what the majority of investors want.

This is why for the most part I usually buy spy put options only during the day when the stock market itself is already headed in the right direction, down. If the S&P 500 is heading down then my SPY PUT options trade is already halfway won. Then it is just a matter of buying the spy put contracts on a bounce during the overall downward move for the day.

Spy Put Options and The Bear Market Of 2008-2009

The spy put options trades in 2008 and 2009 were incredible to say the least. It was rare when I held spy puts overnight or over a weekend during the worst of that bear market. Part of the reason was the chance for huge market jumps higher the following trading day, but also because it wasn’t necessary to hold them overnight to profit. The trend of the market direction by September 2008 was a solid down. Daily trading of the Spy put contracts resulted in enormous gains so there was no need to try to time the market for the very best entry and exit positions.


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)