Spy Put Trade Returns to Start 2013 With A Fat Profit

Feb 8, 2013 | SPY ETF Hedge Strategy (SPY)

Regular readers know that the Spy Put Options are my choice for down days. The Spy Put Options ETF since it was first introduced in 1993 has made my portfolio grow and protected it from large losses. Every time the market has big down days I am busy with the Spy Put Options. The trade strategy is simple. I buy puts and sell them intraday. I very rarely hold them for more than a day or two at most. It’s even rarer when I hold Spy Put Options over a weekend.

Spy Put Options Trade Feb 4 2013

Monday morning, Feb 4, the S&P 500 the index performed exactly as it normally does when it is a sell-off in an ongoing bull market. There is a gap down open, a small bounce back and then further selling to an intraday low. Normally then a rise occurs into mid-afternoon and then the question becomes what will the market do into the close. Almost always there will be selling but when there is selling into the last half hour the question is whether the market will close below the intraday low or lower.

Below is the 5 minute S&P 500 chart from my intraday market direction outlook posted earlier in the afternoon. You can see the normal course when there is a sell-off in an ongoing bull market.

Buying the Spy Put Options then is straight forward. I can’t buy at the open because the open involves a big gap down. Instead I wait for the little bounce and buy then.

S&P 500 intraday 5 minute market direction chart for Feb 04 2013

Spy Put Options 1 Minute SPY ETF Chart

Below is the SPY PUT ETF chart from today, Feb 4, set for 1 minute. Below that is the Ultimate Oscillator which is the only technical indicator I use for this trade. When comparing the S&P chart above you can see how easy it is to get into this trade. The big advantage is that I am confident in the overall market direction being down. If you do not have that confidence then this trade is tough to do since you will always be second guessing the trade.

This is why I do the nightly market direction technical outlook for the S&P 500. On Thursday and Friday last week as well as the weekend, the market direction technical indicators kept insisting there was a lot of weakness in the recent few days and in particular the jump on the earnings report on Friday was overdone.

With selling this morning, I know that there is more selling to come later in the day. It is incredibly rare when the market direction opens lower and then with turn around and just keep climbing. The direction on a day like today is down which gives me confidence in my Spy Put Options trade.

You can see in the chart below the opening drop. The market opened much higher. Look beside the date FEB 4 in the chart below and you can see the open around 151.40 and then the plunge. Here are the key aspects of this Spy Put Options trade.

A. As explained there is always a little bounce back after such a big drop to start the day. You can see it in the S&P 500 5 minute chart and in the SPY ETF 1 minute chart below. It is this bounce that I check for my SPY PUT trade to see whether the Ultimate Oscillator is extremely overbought.

B. The Ultimate Oscillator flashed the overbought signal just about 2 minutes earlier and I bought 60 SPY PUT options for Feb 16 expiry at the $150 put strike for $1.02. When I bought my SPY PUT contracts the SPY ETF was about $150.52

C. I then followed the trade lower and at point C around 11:45 with the SPY ETF at $149.80 the Ultimate Oscillator signaled extremely oversold and I sold my Spy Put Options for $1.44. Not a bad trade on 60 put options. A gain of .42 cents X 60 put contracts = $2520 before commissions.

D. While not extremely oversold this point still would have provided a profit.

E. If I had sold at point D, a second trade could have been considered at point E when the overbought indication was signaled again.

SPY PUT Trade Feb 4 2013

Spy Put Trade – Summary

The SPY PUT trade done on Feb 4 2013 is very typical. To learn how to benefit from using the SPY PUT Options for hedging a portfolio I suggest paper trading to learn whether the strategy I use can benefit your portfolio and style of investing.