SPY PUT Trade Performs Through Comparing Time Charts

Apr 3, 2013 | SPY ETF Hedge Strategy (SPY)

My Spy Put Options hedge works well on days like today. Often though the Spy Put Options will fail unless I am aware that sometimes the 5 minute market direction chart on the S&P 500 is not going to tell me the whole story. Today’s successful Spy Put Options trade relied on my knowing that I needed both the 5 minute and 1 minute S&P 500 charts. Let’s take a look to understand how to use these two charts.

S&P 500 Market Direction Open

For the Spy Put Options trade to be successful I have to understand the market direction outlook. Last night for example I titled my market direction outlook as “sideways”. The market direction technical indicators were mixed. Despite the big run up yesterday, MACD was still signaling a sell signal, the Fast Stochastic was downright bearish pointing to market direction down for today, the Slow Stochastic was signaling lower by week’s end. These three market direction technical indicators then were putting to weakness for today. Rate of change was unchanged and momentum was up slightly while the Ultimate Oscillator was the only market direction technical indicator that was climbing higher. So basically 3 were negative, 2 were neutral and 1 was bullish.

With that knowledge I always watch the open. The opening was poor with the market beginning to sell from the outset.

By 9:40 the market direction was moving lower and by 10:00 AM there had been no bounce back.

Spy Put Options Based On S&P 500 5 Minute Chart

The first thing I had open was the S&P 500 set for the 5 minute chart. Below is what I saw. Note how by 10:30 there still had been no overbought signal from the Ultimate Oscillator. The reading at 10:30 was 58.75 which is overbought but certainly not extreme.

Spy Put Options S&P 500 5 minute chart

Therefore this means it is time to turn to the 1 minute S&P 500 chart.

Remember how the market direction outlook was for a sideways movement. Therefore at 10:30 the market could easily just be wandering and could turn back up or just drift sideways. Selling was not heavy at 10:30 which is part of the reason why the 5 minute chart was not giving extreme readings either overbought or oversold.

But the 1 minute S&P chart told a different story.

Spy Put Options Based On S&P 500 1 Minute Chart

The 1 minute chart gave a better indication, which is to be expected. At 10:27 the Ultimate Oscillator reading was 69.46. This meets the conditions for an extreme overbought signal. However knowing that the market direction call is for sideways I waited until I saw further downside action.

S&P 500 1 minute chart

New Lower Low

Half an hour late there was still no rally and at 11:00 AM a bit more selling hit the S&P and pushed the direction slightly lower. I bought at 11:00 AM.

S&P 500 5 minute chart

From there is was simply a matter of watching and waiting for an oversold reading on the S&P 500. For that I returned to the 5 minute chart as the 1 minute will often give far too many oversold indicators, which is obvious in the above one minute chart. There were two good oversold readings. The first was just 12:30 but as there has been no rally to speak of I held through that signal.

The second was at 1:40. Again I waited as there was no rally back. Finally the Ultimate Oscillator moved back higher and I felt that the selling since it has not been big volume, could easily push back. I had finished by intraday market comments in which I indicated I would not be surprised to see the buyers push back. I therefore sold my Spy Put Options at 2:05 PM.

Spy Put Options Hedge Summary for April 3 2013

It was a good day for those holding puts on a variety of stocks. I did well on my Spy Put Options trade but certainly nothing like the previous two Spy Put Options trades earlier this year. It was because I had to wait to buy until 11:00 AM to be sure that the market direction was still going to move lower. It did move lower but there was no panic selling here as selling was strong but certainly not overwhelming and buyers were picking up shares here and there (myself included).

So without a heightened sense of fear among investors per the two earlier trades this year, the returns were decent but not terrific. Nonetheless it adds to my Spy Put Options cash cushion and that’s the whole reason to do these trades, to grow that cash cushion to prepare for a time when the portfolio may need more protection.