Friday was one of those rare days when a lot of trades work out right. In the early morning I did an excellent IWM Trading For Pennies trade (select this link to read about that trade) and then into the close I was busy profiting from the downturn in the S&P 500 through the Spy Put Options as the index plunged into the close.
The drop into the close ended with a profit of $8150 after commissions against capital in use of $15445 for a return of 52%. This marked the biggest gain for this year in the Spy Put Options trade. Let’s review that trade and then discuss how I knew it was time to buy Spy Put Options even though the market seemed like it was hanging on as it moved sideways through much of the morning and early afternoon. I then look at how the rate of change technical indicator kept me in the trade bringing in the biggest profit of the year to date.
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. The periods will make the most difference when using the Ultimate Oscillator to profit from trading the Spy Put Options.
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. Remember, I am not using the SPY Chart with the Ultimate Oscillator. I am using the S&P 500 chart. I set it for one day at 5 minutes.
Spy Put Options Trade (SPDR 500 ETF) May 31 2013
In the chart below you can see the 5 minute chart for the S&P 500. The market opened sideways with a slight drop. (Point A) and then by 10:00 AM since it had not sold off, investors bought and pushed the S&P 500 higher. By 11:00 AM though the market direction had changed back and by Point B, there was a growing weakness in the market. The pull back by point B was not strong but there was no rebound, instead the market direction drifted sideways. The sideways pattern had no strength and at 12:50 I bought Spy Put Options on an overbought signal from the Ultimate Oscillator. At Point C around 2:00 PM the market direction had drifted lower than point B and right after 2:00 PM selling took the S&P 500 lower than the low of 10:00 AM.
This pattern of lower lows has been dominant in spotting market directions that are about to change. Friday was another example. I knew then to hold my Spy Put Options into the close.
Spy Put Options and The Ultimate Oscillator
Below is the same chart as above but with the Ultimate Oscillator technical indicator. You can see the overbought indication from the Ultimate Oscillator which was strong despite the fact that the S&P index was not moving higher but was moving sideways. I bought at that overbought signal indication in the S&P 5 minute time frame.
Rate Of Change Technical Indicator
But to be able to stay with the Spy Put Options trade right into the close there was another indicator I like to use once in a while, especially when the S&P 500 is trending sideways. That indicator is the Rate Of Change.
Rate Of Change Settings For Spy Put Options
I use the rate of change indicator set for 20 period against the 5 minute time frame of the S&P 500. This is because I don’t want to be whipsawed by the market. 20 minutes is plenty of time to flatten out the market direction changes to give me a better clue as to the underlying current of the market.
Rate Of Change Readings
The Rate of Change is excellent as it can advise the strength in a change in the underlying trend. It is a great tool to help spot when the market direction may be about to shift as it follows the buying and selling of stocks by investors.
Let’s take a look. I have marked the key aspects in the S&P 500 5 minute chart below.
A. About 15 minutes or so before I bought my Spy Put Options, the rate of change had turned negative indicating that selling was intensifying and the market direction was changing from up to down. That was the indication, even though if you looked at the 5 minute S&P 500 chart you can see that it would appear the direction is sideways not down. A few minutes later the rate of change was turning even more negative when I bought my Spy Put Options.
B. The first sign of a possible change also came from the Bollinger Bands which entered a squeeze. FullyInformed members know from reading various articles about the Bollinger Bands Squeeze that this important signal most of the time ends with the underlying asset turning lower which is what happened to the S&P as it fell to the Lower Bollinger Band.
C. Meanwhile the rate of change had climbed back as obviously investors were busy buying this latest dip, but the rate of change failed to turn positive but instead indicated there was still more selling than buying going on. With rate of change staying negative, it was easy to decide to continue to hold onto my Spy Put Options to see if the market would move lower.
D. The S&P 500 as it fell, clung to the Lower Bollinger Band, which is negative for any directional trend.
E. The movement in the S&P 500 sideways from the Lower Bollinger Band saw the market attempt to rally back by if you look at the bottom arrow extending away from point E, you can see that the rally failed to bring the rate of change even close to being positive. In other words, the rally back was being sold into by investors and the rate of change was indicating this as it rallied back a bit and then moved even lower.
Risk Versus Reward
When buying the Spy Put Options for this type of trade exactly how high is the risk of loss? In reality this trade has very little loss potential and by using the rate of change indicator, the risk is lowered even more.
When I bought my Spy Put Options I already knew that my market direction outlook for Friday was for the market direction to drift sideways with the bias down. By the time I bought my Spy Put Options the market direction was already unable to push beyond the late morning high and indeed it was already drifting sideways not up. When a market is already weak, the chance of a big run-up is very limited. Therefore even if the market direction had changed to up, the losses would have been minimal since any upside potential in the market was limited by the pattern already established. As well, after I bought the Spy Put Options the change in the trend continued to stay sideways. There was no reason to even consider closing this trade early.
The risk that Friday’s Spy Put Options trade would end in large losses was almost nil thanks to the rate of change indicator which signaled continuing weakness as the trading day wound down.
Spy Put Options Trade Summary May 31 2013
Thanks to the rate of change indicator, this Spy Put Options trade ended with the largest gain to date for the Spy Put Options strategy. I have used the Spy Put Options since 1993 when it was first introduced and it has become my preferred method of hedging. Depending on the overall size of a portfolio and how much capital an investor was willing to commit to the Spy Put Options strategy, an investor could earn substantial profits while benefiting from having their capital at risk for only very short periods of time.
The Spy Put Options strategy can be applied throughout the year during periods of weakness. It is simple, effective and highly profitable and when done with the right tools, the Spy Put Options strategy remains my favorite method for earning excellent returns during periods of weakness and corrections within the S&P 500.
To view this trade’s statistics select this link and scroll to May 31 2013 in the table.
Spy Put Options Internal Links
Review 2013 Spy Put Options Trades
Review 2012 Spy Put Options Trades
Review 2011 Spy Put Options Trades
Review 2010 Spy Put Options Trades
SPY PUT Options Strategy Articles