On Thursday, April 4 I did another trade using the Spy Put Options as I continue to build up my cash cushion to protect against any large declines which might occur during the year. Thursday’s trade was smaller than Wednesday’s but is interesting to review as I missed the original sell signal from the Ultimate Oscillator but knew what to watch for to try to recover the trade. Let’s take a look.
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.
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 4 2013
In the chart below you can see the 5 minute chart for the S&P 500. The market opened up with a pop but remembering that the market direction outlook from Wednesday was for a morning bounce and then some selling, I waited for the S&P to show signs of being overbought. The overbought signal was seen around 9:55. I waited for the overbought signal to erode and for the S&P 500 5 minute chart to show signs of a pullback. You can see them in the chart below as the red price candlesticks started to show by 10:10. At 10:12 I bought 60 Spy Put Options puts and went out a little over a week to April 12 options expiry. I find going out just over a week provides good volume and better premiums than staying with the closest week.
A couple of aspects of this trade are interesting from an educational and learning aspect. first was that this trade could have been done twice.
Spy Put Options Trade 10:30
At 10:30 the S&P 500 pulled back almost to the day’s open. The Ultimate Oscillator signaled oversold and I could have sold my Spy Put Options at that point. While the profit was just .12 cents it was still a profit. Looking at the chart you can see that I could have bought back the Spy Put Options around 11:00 AM and then entered the Spy Put Options trade again.
Instead I thought the market had further to fall and I held onto my Spy Put Options. This was a mistake as the market direction rapidly recovered. I could have sold my Spy Put Options puts at this point but the gain was under 10 cents.
Spy Put Options Trade 11:00
I watched the Ultimate Oscillator and I noticed that as the market direction rose the Ultimate Oscillator did not signal overbought and shortly after 11:00 it began to turn back down and the S&P 500 turned down as well. The second recovery at 11:00 was not as high and the Ultimate Oscillator did not rise as high as it was even at 11:00 AM so I continued to hold.
However I should have sold at the first oversold signal at 10:30 and then considered buying back in at 11:00 although without a full overbought signal at 11:00 I probably would not have bought back in to the Spy Put Options.
Spy Put Options Trade 12:14
The next oversold signal was at about 12:14 and I sold for a 19 cent profit. Looking at the chart though you can see that I could have held again through the next rise and then sold shortly after 1:00 PM.
Spy Put Options Trade Summary Apr 4 2013
I thought the trade was interesting to show that when a mistake is made such as I did at 10:30 by not selling my Spy Put Options at the strong oversold signal, you can still rely on the Ultimate Oscillator signals to assist you in keeping the trade profitable. By watching the Ultimate Oscillator I was able to see that the rise in the S&P 500 after 10:30 was not going to recover the S&P 500 and as such there was a good chance the market direction would fall back and despite missing the 10:30 sell signal, make this trade profitable.
Sometimes then even when a trade signal is missed or not acted upon, by not panicking but instead staying with the Ultimate Oscillator readings and watching for signals, you can turn what could have been a poor trade or even a losing trade into a winning one.
I thought readers might enjoy this email from a reader who had followed my twitter postings on this trade as it unfolded.
Just letting you know, I did my first SPY put trade today and it was successful. I initially bought 20 May 3 $155 contracts at 10:10 PM for $1.79 and after seing your twitter post, I looked at the chart and it was set up pretty well, so I bought 30 April 12 $152’s at 10:58. I sold them all at 1:19 and got $2.15 for the 155’s and $0.77 for the 154’s. It is somewhat difficult for me to do these since I am at work, but it was nice to get a few hundred profit.
To do the Spy Put Options trade after hours I suggest reviewing this article on how I trade the Spy Put Options when I am unable to watch the market. The article is older but still pertinent.