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A) THE SHORT VERSION: 4 Steps using the oscillator
STRATEGY 1: When I can watch the market throughout the day
STRATEGY 2: When I am unable to watch the market during the day




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Put Selling
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Example Trade- Selling Puts
Tools For Picking Naked Put Strikes
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Understanding The Naked Put
4 Basic Rules For Selling Puts
Selling Puts For Profit & Avoid Assignment
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Put Ladder On Barrick Gold Corp
Rolling Put Options Strategy
Covered Calls
Earn 3% With In The Money Covered Calls
Rolling Covered Calls Down
Staying Positive
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Writing Uncovered Calls
Long Straddle
Importance Of A Plan, Goal & Objective
Early Warning Tools
Understanding The VIX Index
The Cautious Bull
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"Squeaker" Option Trade On JNJ
Dividend Stocks That Cut Dividends
Hedging Downturns With SPY Puts
Defensive Stock Investing
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My Strategy Explained
Rescue Strategies for Bank Of America


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Nothing presented is financial advice, trading advice or recommendations. Everything presented is the author's ideas only. The author accepts no liability for its use including errors and omissions. You alone are solely responsible for your own investing and trading. There are considerable risks involved in implementing any investment strategies and losses can be large. Trade at your own risk.

Feb 12 2010  / Strategy Discussion

In a market downturn I like the SPY puts. For me the biggest reason besides having used them for years, is because they have good premium and as they follow the S&P accurately, premiums are always decent and reasonable. In a downturn, volatility will force up the premiums. I always try to buy 2 months out and slightly in the money.


Some of my friends tell me that Powershares (QQQQ) are better and cheaper. I have not used them, but if you have experience with them, you could contact me with some of your results and I would be pleased to share them with other readers of my site. The Ultra shorts are not my choice and I have never used them on the S&P. The problem with the Ultra Shorts I have found from back testing, is that when the market moves against me, losses can be large. Unless I get out quickly I can be looking at larger losses than the puts, not always I suppose, but certainly when I have studied the Ultra Shorts, it does appear to me that the puts are better to hold. It's my choice, but definitely by volume, I can tell I am in the minority. The Ultra Shorts are very popular. 

Buying puts is tough for a lot of people as it is going against how we are taught about investing. We are all fed the story of stocks moving higher. Why then buy puts? Simply because the market trend at times is down and not up. When this happens I have to decide if I have faith in the market call. When I buy a put and the market moves higher, which often happens, I am looking at a loss. I have to decide if I can stand the loss. To learn my strategy I spent two years paper trading. This meant checking past market calls, plotting the moving averages and seeing how often when the averages indicated that the market was turning down, the market did indeed move lower. It's a question of building my confidence in my ability to read the market signs and believe in my purchase of puts to hedge my positions.

If investors do not have this confidence they will continue to second guess themselves and hesitate when they select the moment to buy and sell their puts. Option premiums in a down trending market change quickly. Hesitation can make the different between a good entry and exit point and a poor one. Some investors that are unsure that the market is changing its trend, buy a handful of puts on the stocks they already own. That way they feel they are still hedged to a certain degree.


Here is how I trade the SPY puts in a downturn. I try to always stay just slightly in the money (ITM) when I buy the puts and I always try to follow the market and buy them on a bounce or near what looks like a high for the day. I like slightly ITM as it holds its premium a little better on an upswing (should the market not go down) and gives me a chance to get out with a smaller loss. I never buy the closest month. I always buy the next month out. This is because premium decreases quicker in the closest month. If my market timing was wrong and the market turns up NOT down, the closer month will lose premium more than the next month out. It goes without saying then, that if the market is indeed falling, the closer month's puts will not have as much premium as the next month out.


As to the number of put contracts bought, I believe it all depends on an investor's comfort level and the amount of stock they are holding. If I was holding 2000 shares then perhaps 10 puts is comfortable. Every investor has a different level. Primarily I am seeking some capital income from a market downturn. Therefore I set aside an amount of capital and that determines how many puts I can afford to buy. In 2010 for example I set aside 12,000 for Spy put purchases.

I pick the opening price for the day, look for a bounce and then buy my Puts. A good example is Jan 27 2010 below. The red shows high points during the day and the blue shows areas where you could consider selling during the day. So how do I tell when to buy the puts?


A) For me I have confidence that the market is moving lower, so that means if by chance I buy my puts at the wrong moment I have confidence that the market will move lower than where I bought them, perhaps not today, but maybe tomorrow.

B) I plot out the 5 period simple moving average for the day. It's the green line on the charts below. Any time the SPY is above the 5 period SMA are good points for me. The higher above, the better. I know I can never catch the top nor the bottom, but through practice I can catch when the spy turns lower after rising.

C) I use a stop loss above where I bought my puts and move it lower if the SPY trends lower, but I am willing to take a loss, again because I believe that should I get stopped out on a move higher, I can buy back in at a higher price and recover my loss on the next move down.

D) When the market moves lower I put in my sell point.



On Jan 27 2010 for example (above), any of the red points were good buys. Any of the blue points were good areas to sell. In the morning I put my sell in at $4.15 which was just before 10:30 AM. The market then drifted higher. At around 1:10 PM or so, I was filled at $4.15 and the market drifted even lower, but I did not buy back in as most of the time it was below the 5 period average. I waited and I almost bought in at around 3:00 PM which would have been fine, but then the market fell below the 5 period moving average before I was filled and then shot up again. That's when I bought back in, on the second bounce in the later afternoon just before the close. A lot of investors would not have bought in at the close as they don't want to hold the puts over the evening to the next day. I don't mind so much during the week. Weekends are different. A lot can happen over a weekend. During the week I will buy back in because I have the confidence that the trend is still lower. Remember, it is easy to be wrong and the close of the day on Jan 27, (below) could have been a big mistake. The market could have jumped higher the next day at the open. This is again where confidence has to come in. In my instance my indicators showed that the trend was down. As I have faith in the 5 period moving average strategy I buy the puts, knowing full well I can easily be wrong and the market could in fact have bottomed on that day at the close and will move higher. It's impossible to be right all the time, but if I continually wait for the "perfect" time, that time will never arrive.

E) Since I know from experience that I can never be right all the time, I only hold for a short period and sell often in the same day, to capture my profit. My strategy is to build up a cash cushion to assist me when the market turns and my put buying will be the incorrect strategy. A cash cushion will insure that I have a profit from the market downturn.

I never hold my puts for long. I am never interested in holding puts throughout a downturn and then try to pick the bottom. I prefer to keep buying and selling throughout a downturn in order to build my cash cushion larger and larger to ensure there is a profit when the bottom is reached and the market bounces.


Above is Jan 28 2010.  Not as many points to try to buy in until the afternoon. However if I had bought in the morning at just after 10:30 on that little bounce, I could have set my sell price around 11:40 AM or 12:30 PM but I would not have been filled on Jan 29. I could also set my stop loss at the day's high at the open. The next day (Jan 29) I definitely would have been filled. 



Jan 29 2010 above is the last chart. Again the red are areas I would consider buying and blue consider selling or picking a selling price to enter. On Jan 28 2010, I was holding puts from Jan 27. I sold them around 12:30 and then bought back in around 3:40 PM when the market hit around 109.75. I immediately put in my sell price for $4.30 and was pleasantly surprised to get filled right near the close.


It was easy to buy the second move higher around 10:30 as the market started to pull back. But at first I thought the market might go sideways and I thought it was better to hold to my position over the weekend. However by 3:30 PM with the market below 108 (support level), I took the profit and determined I would rather reassess Monday morning before picking my point to buy the puts again.


Why do all these trades? Why not just buy the puts on Jan 22 and hold until the market gives a clearer direction lower or higher? I am not into day trading, so why am I trading the spy like this? When I trade the SPY in a down market I want to build a cash cushion. For example with my trades below, by Thursday I have built up a 30% return or $4153.00 in cash. This will go a long way to cover losses should the very next day I buy into the market and instead of going down it moved higher. Rather than be sitting with a loss I am basically giving back some of the profit I have made earlier.


Once I have a cushion, I can decide whether I want to hold the puts longer, perhaps two or more days, or whether I would like to continue to trade them daily. One thing you'll notice is that the daily trading from Jan 22 to Jan 29 were almost all within the same strike ranges, from $110.00 to about $108.00. I am not surprised by this as $108 was support and normally the SPY should bounce off support a few times and either move higher or begin the move lower, which we saw on Friday Jan 29. Once the move lower has begun I would expect the market to continue to move even lower to the next support at 1050 and if it fails to hold then 1030 or 1035. The move on Friday Jan 29 was dramatic and tells me that the market could very well be in larger trouble than many realize. The chart below shows the volume for Jan 29 2010.


The market had a strong move higher in the morning and fairly good volume, but then the second move higher was on dwindling volume and as the market moved lower through the day the volume became thin. By 2:40 PM as the market moved lower, volume increased telling me that the VIX is probably higher as investors are becoming unsettled.


Everyone likes to think that the panic seen in September and October 2008 as well as February and March 2009, is a rare event. Most investors think, "this time if the market starts to move lower I will be ready to add to any positions I have not sold out" or buy new positions, but when a drop comes, most investors including professionals and the "smart money" panic and very few want to put more capital at risk. The panic feeds on itself and more selling arrives. Buyers start dropping off and the price of shares falls dramatically lower, which adds more fuel to the panic. When that happens, it's easy to tell because the volume chart picks up AND the indexes fall dramatically.


During such a dramatic downturn I usually hold on for the day until I feel the profit is warranted OR the volume starts to die off. I do not believe anyone can go wrong by taking profits whenever they wish. If the market is going to move lower, there will continue to be times when you can buy puts again. When there is a dramatic downturn there will be large jumps higher which will present new opportunities to buy the puts again.

Eventually I will be wrong with my puts and the market will move higher leaving me with a loss. I can never tell when the market is going to make that bottom and move higher rather than continue lower. I don't truly think anyone can, which is why I like to build my cash cushion early in the downturn.


I like to build my cash cushion larger and larger throughout the year, because I know there will be times when I buy puts, I am going to be wrong.



A) THE SHORT VERSION: 4 Steps using the oscillator
STRATEGY 1: When I can watch the market throughout the day
STRATEGY 2: When I am unable to watch the market during the day



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Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. is a private website. Everything presented and discussed are the author's ideas and opinions only.
By using this site, you agree to be bound by its terms of use. The full terms of use can be read here. If you do not agree to the terms of use, do not use this site. The author of assumes no liability for topics and ideas discussed, errors and omissions, ads and their content and external links. Any corporate insignia used are registered trademarks of their respective company or corporation and are being used for identification purposes only. All material copyrighted by Reproduction in whole or in part prohibited. Copyright 2008

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