SPY PUT Trade – Money Left Behind

Apr 16, 2013 | SPY ETF Hedge Strategy (SPY)

On Monday I had expected some selling as explained in my market direction comments from Sunday which you can read here. In the morning then the market opened lower because of the huge drop in gold but the market seemed to stabilize and I waited for the first overbought signal from the Ultimate Oscillator to buy Spy Put Options. As regular readers know, the Spy Put Options is my method of hedging during market downturns. At the first little rally the Ultimate oscillator flashed the oversold signal and I bought 60 of the April 26 $157 Spy Put Options. The S&P was sitting at around 1580.50 when I bought my Spy Put Options at 10:55.

Spy Put Options – Ultimate Oscillator Settings

I set up the Ultimate Oscillator with my settings of Period 1 at 5, Period 2 at 10 and Period 3 at 15. Factor 1 is at 4, factor 2 at 2 and factor 3 at 1. You can see the settings below. If your trading platform does not allow you to set up the factor settings then leave them at the default but change the periods.

Spy Put Options Hedge Ultimate Oscillator settings

I then set up the S&P 500 chart for 5 minutes to spot oversold and overbought readings to time when to buy the Spy Put Options and when to sell them.

Spy Put Options Trade (SPDR 500 ETF) April 15 2013

In the chart below you can see the 5 minute chart for the S&P 500. The market opened up with a drop and almost always there will be an attempt at a rally back. I waited for the S&P to show signs of being overbought and it was seen around 10:50. I noted that the overbought signal was dropping so within 5 minutes I bought my Spy Put Options. I bought 60 Spy Put Options puts and went out a little over a week to April 26 options expiry. I find going out just over a week provides good volume and better premiums than staying with the closest week. I paid $1.15 for the $157 put options.

S&P 500 5 minute chart for buying Spy Put Options

Spy Put Options Sell at 2:20 PM

I held the Spy Put Options through the first oversold signal around noon as the selling seemed to be intensifying. The next oversold was shortly before 1:00 PM but again I held the Spy Put Options for the same reason, selling was not easing up. Shortly before 2:00 PM the S&P 500 moved once again in an oversold signal from the Ultimate Oscillator and after the second signal shortly after 2:00 PM I felt satisfied that the market had bottomed for the day and I sold at 2:20 with the S&P around 1561.25. I thought I had done well as the sell was for $1.98. This was an excellent return, but little did I know that following a short rally the market was going considerably lower. The $157 put closed at $3.00! I had left behind over $1.00 of premium.

Spy Put Options Sell April 15 2013

Spy Put Options Trade Summary Apr 15 2013

While it was still a great trade I could easily have bought the Spy Put Options again after 2:20 when the market rallied and then turned back down. As well there were several points during the day when I could have bought Spy Put Options and sold them and then purchased them again. The trend was decidedly lower. What I did think was interesting was I received an email from an investor who follows the Spy Put Options trade and had bought Spy Put Options in the morning at 9:30 before heading out to work. He returned home at 5:00 PM to find he had made almost $2.00 on a $1.00 investment. He is still holding his Spy Put Options put options but hopes to sell them first thing in the morning before heading off to work for 10:00 AM. Now that would be a great treat to come home to, wouldn’t it.