I hope you find the information, concepts, ideas and strategies on my site of value. If you would like to assist me with the maintenance costs, and time spent keeping my site updated, I have set up a Paypal account for those who would like to donate. Thank you in advance. Remember, nothing on my site is financial advice or recommendations. Investing is risky and losses can be large. Trade at your own risk. Read The Disclaimer

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.

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.