SPY Put – Back To The 5 Period SMA

Today’s market volatility is simply excellent for the SPY Put Trade. I must admit that I am enjoying this volatility. I realize that many investors are not and I sympathize, but this is what investing is all about and I don’t believe the European Debt Crisis and Banking crisis are going to go away any time soon. I also don’t believe the economy is going to rebound any time soon as well, so volatility is probably here for some time.

My SPY Put Trade though, works wonders in this climate and continues to build up my cash cushion for those days when I will be wrong and the spy put trade won’t work out.

The SPY Put as readers may recall is my favorite trade for down days and bear markets and today is a great day for this trade.


Right from the open, the S&P 500 gapped down. All the European news and the trouncing of European stocks, particularly Germany could be seen in the market futures before the opening bell as the market was already down steeply before the bell at 9:30 AM.

I immediately set up my chart for the SPY Put trade as per my Hedging Strategy Number 1 article on how I use the SPY Put for Hedging during market downturns  when I can watch the market throughout the day. If you have not read the article, you might want to review it through the link above in order to better understand today’s spy put trade.

Today’s chart is below. At the open the S&P 500 gapped down, (which by the way is a sign of a bear market – you can read some of the warning signs through this link) and I set up my chart with the 5 period simple moving average and I set the time frame to 1 minute.

When there is a gap down open, almost always the market will rally and sure enough today’s gap down rallied until about 10 AM. At this point the trend moved solidly above the 5 period Simple Moving Average (SMA). You can see this in the chart below. The 5 period SMA is the green line. The blue lines are the bollinger bands. If you look closely you can see that the trend broke decisively above the upper bollinger and the 5 period SMA at the same time. That’s when I bought my 20 SPY Puts for Oct at $115.00. If you look at the chart you can see that when I bought my spy puts, it was the first time the trend broke solidly ABOVE BOTH the 5 period SMA and the Upper Bollinger Band.

 Spy Put - Sep 6 2011


After I bought you can see in the chart above that the trend stayed up but it never again broke through the upper bollinger band and did not decisively break through the 5 period SMA again. Over the next half hour or so the S&P moved lower and then the trend fell below the 5 period SMA (the green line) and eventually fell through the lower bollinger band. I began to move my stop loss down following the trend lower.

Around 10:40 AM the SPY fell  to around t 114.50 and I moved my stop loss to $114.75. The market bounced back and my spy put trade ended as I was sold out at $114.75.  Total profit of the trade was $936.00 after commissions or 8.6%. You can view today’s spy put trade by selecting here and scrolling to today’s date.


By using the stop loss, I have guaranteed myself that in a bounce I will be taken out and lock in my profit. As well it releases my capital from the trade and eliminates the risk of the market climbing too high and creating a loss. Looking at the chart below I can see the aftermath of the trade.  Rather than the market selling off lower, the market recovered and moved higher and as the afternoon progressed the market climbed higher still which would have created a loss with my spy puts.

Spy Put Trade - aftermath
This is why it is so important with my SPY Put trade that I have in place the stop loss once I have bought my spy puts and the market turns down. If I buy the SPY Puts and the market turns up, I normally sell my spy puts for a loss and wait for the 5 period SMA to again tell me when the SPY Put trade should be put in place again.

The SPY Put trade using the 5 period SMA probably would have worked again in the mid afternoon when shortly at 2PM the trend moved above both the upper bollinger and the 5 period SMA. That trade could have been closed after shortly after 3:30 as the market again turned back up. However I was busy with a few other trades as I now believe the market has tested this low and should move higher for a few more days and perhaps again challenge the 1260 on the S&P.

This SPY Put trade as you can tell from reviewing the previous two years of trades, has been an excellent performer. The SPY Put has for me been the strategy of choice in a correction or bear market. To date, the SPY Put trade has brought in $56,533.00 of capital which is protecting my entire US Stock Portfolio. Should the bear market continue and I believe it probably will, then my SPY Put trade should rival the returns of 2010.

I think any investor interested should paper trade for a while to determine if the SPY Put trade is for them. In today’s volatile market I believe every investor needs some form of hedge whether it be the SPY Put or a different option or inverse fund strategy.