SPY PUT Trade Needs To Be Built Around Overall Market Trend

My SPY Put trade to be consistently successful has to have the market trend intact. That means only using the spy put hedge when the market trend is definitely down. While my market timing indicator last night, the slow stochastic told me that there was a possible bounce coming  it is important to understand that all the other indicators including slow stochastic are pointing to an overall lower market before this ends. That is the most important element in using the SPY PUT successfully. This morning the immediate selling right out of gate told me “BUY SPY PUTS” and buy a lot.

Below are the market timing indicators from last night. Aside from momentum the most important element to remember with readings like these is that the market is under enormous stress to move lower. Yesterday’s lull in selling could have been a simple “wait and see” approach when it comes to European events. But with the slow stochastic at %K 31.77 and %D 51.85 the strength of %D tells every investor that any bounce, which I had thought might occur, would be very short-lived and the market must push lower.

Market Timing and Market Direction indicators for May 7 2012

Market Timing and Market Direction indicators for May 7 2012 show a market perhaps ready to bounce.

SPY PUT Trade When To Buy BIG

With such negative numbers in the slow stochastic and fast stochastic when there was no bounce out of the gate this morning, this tells me as an investor buy BIG numbers of contracts on the first bounce. I did this buying 40 SPY PUT contracts on the first bounce. It’s easy to know when to increase the number of put contracts to buy because of the market timing indicators above. My instincts looking at the slow stochastic is what told me there might be a possible bounce (hence the title of last night’s article), but the reality of the market timing indicators is the stock market is going to fall further. The chart below shows the first bounce, the typical overbought indication and then the buy on the 40 spy put contracts.


At the first bounce with ultimate oscillator flashing overbought it marks the time to purchase spy puts


Selling The SPY PUT Contracts In Groups

If you recall, in April I had mentioned that the first line of support in the SPX was 1350. With the selling at the open I expected the market would test that support level. My plan was to sell the SPY PUTS in groups as the market fell, then wait for a rally to buy them again.

This simple strategy has served me well in the past. It doesn’t guarantee I will get the bottom and in fact the stock market could surprise to the bottom and collapse even lower than I anticipate. But it does ensure that I unload them a little at a time and should be able to gain a decent profit.

SPY PUTS – 1st Group Sold

Below is the first sell of 10 SPY PUT options contracts.

SPY PUT Trade - Selling In Groups

The strategy is simple. Buy a large number of SPY PUTS and then sell them in groups as the market falls to test the 1350.

SPY PUTS – 2nd Group Sold

Shortly after the first group was sold the S&P500 fell to test the 1350. I sold the second group of spy put options contracts. I sold the largest group here  of 20 spy put contracts because the 1350 was my goal for the original test of today’s decline.

SPY PUT TRADE second group of spy put contracts sold

The second group was the larger of the two since the goal was 1350 on the S&P 500.

SPY PUTS – 3rd and Final Group of Spy Put Options

By holding onto the third and final group of SPY PUT contracts I can take advantage of any possible further decline in the S&P500 in case investors panic a bit and push the SPX below the 1350 level. At the same time if I am wrong and the selling slows and the S&P 500 moves back up I can then sell the final group and wait for a rise up in the SPX and then buy more spy put contracts to sell again later in the day.

However within a few minutes the S&P500 pushed lower than the 1350 and I sold my final spy put contracts. This could have been an error on my part as the market could fall even further. Panics are strange events as investors start to sell more shares which of course pushes the market lower and then investors sell more shares again.

SPY PUT contracts final sell

When the market fell below 1350 I sold the final group of spy puts options contracts

SPY PUT Hedge Summary Of Morning Trade

To summarize I would expect a push up higher from this level but that does not always happen. The 1350 marks the first line of support for the S&P at this stage and usually the first line of support takes a bit longer than one day to break decisively. The fact though that investors broke through that line this morning tells me to buy more spy put contracts with the next big rise in the S&P because it is even rarer when a break of support is not tested at least once more and with all the bad news this morning I am sure the stock markets will be moving lower.

The SPY PUT is an extremely versatile hedge to protect my entire portfolio. As this is probably just the start of the May sell-off, I am sure there will be lots more opportunities ahead to add to my profit while protecting my portfolio thanks to the SPY PUT Hedge.


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)