Regular readers know that I use buying SPY PUT options as a hedge against market declines. There are two key elements that continue to make my SPY PUT options trades consistently successful.
1) Having confidence in my market timing indicators when they show that market direction is lower. For example on Monday after the market close I wrote my market direction / market timing column which indicated that the market direction for Tuesday was down. I don’t second guess my market direction outlook when Trading Options. If the market direction opens as expected and continues to follow the market timing analysis for the day I buy my SPY PUT options as soon as I see a bounce and an overbought indication in the ultimate oscillator.
2) I rarely hold my SPY PUT options overnight. I stay for a short period and sell my SPY PUT contracts for a gain, any gain, when I see the oversold indication in the ultimate oscillator. Trading Options when using the SPY PUT options does not require a complex strategy but does require confidence in underlying market direction and the ability to move quickly to buy and sell the SPY PUT options contracts at the proper Ultimate Oscillator signals.
SPY PUT Hedge Consistent Performance When Trading Options
The SPY PUT Hedge is continually successful when Trading Options for the above two reasons. I am very unconcerned about buying or selling at the very best moment to earn the very best profit for the trade. I am more concerned about building up my cash cushion every time I make a trade with the SPY PUT options. The SPY PUT hedge is not a matter of a single trade here and there. It is a strategy of constantly watching the market timing indicators for weakness and capitalizing on that weakness. The goal is to concentrate on enlarging my cash cushion with every trade, whether it be by $100 or $1000, it doesn’t matter as long as it is a profit and not a loss.
Today’s SPY PUT Trade
Today’s SPY PUT trade was based firmly on the above two key elements. I used the 5 minute S&P 500 chart for the day as I have often found when the market is selling off in a large way the 5 minute chart with the Ultimate Oscillator keeps me in the SPY PUT trade longer than the 1 minute and increases the likelihood of a larger profit. The 1 minute S&P chart on big down days tends to give more oversold and overbought indications but with smaller profitable returns. However those who love trading could easily use the 1 minute chart. I prefer the 5 minute on big down days.
Around 11:25 I purchased 20 SPY PUT options contracts. By 12:25, I had sold all 20 contracts. I have marked three items that may be of interest to those readers interested in the SPY PUT options for trading in downturns.
A. After I had sold my SPY PUT contracts, the S&P recovered somewhat and I could have bought more SPY PUT contracts with the new overbought indications. I did not simply because this is not yet a bear market. Remember that I have written in my market direction / market timing columns that the market direction is still up until 1325 is breached. Therefore the move back up was:
1) Possibly a rally back to a high and I may have sold at the bottom for the day. I had no way of knowing what this overbought indication at point A was all about. I had already made a trade for the day which was very profitable. The profit added to my cash cushion. Remember my two key elements. One of them is not worrying about the size of the profit. The market in the morning did not plunge lower, but drifted down. I bought at 11:25 when I saw the overbought indication in the morning because it was early in the day and my market direction / market timing calls for today were for the market to move lower. By the time I sold at 12:25 the market direction was already low. As this is still an “up market” in the sense that I believe it must break 1325 to signal a clear change in direction, why risk turning my first trade which was a profit, into a second trade that was a loss.
2) The second move back to an overbought reading did not see the S&P reach the same high as when I had originally bought at 11:25. By point A, the rally back up was muted and not much higher than where I had sold my SPY PUT contracts. Again, the market direction is not yet confirmed as solidly down. If it was then buying SPY PUT options a second time would warrant the risk of a possible loss.
B) The second oversold indication was much stronger than where I sold my SPY PUT contracts. However again, remember the key elements as to why I remain profitable with my SPY PUT trades. I take my profit and never worry that I could have sold for a better profit later on. I never second guess the profit made. I sold within an hour of buying and made a nice profit. The thing to always remember is, I made a profit. Forget what “might have been”.
C) A huge overbought reading near the close of the day is something I always ignore. Unless the market is confirmed as a bear market, I never buy near the close despite overbought indicators. Only “big bear” markets can provide enough volatility overnight to give me enough reason to risk my capital overnight. Again, remember that the goal is to balloon the cash cushion, to make it bigger with each SPY PUT trade, large or small. Over the years I have found that less than 50% of my overnight trades were profitable. Less than 25% were profitable when held over a weekend. There is no doubt that if the market direction gaped down the next morning any SPY PUT contracts held overnight are going to be worth a lot more than what I paid, but I have found that when I am wrong and the market opens strong the next morning, the loss can wipe out more than a few profitable trades.
The S&P 500 for July 24 shows the steady erosion until about half an hour into the close. I had already bought and sold my SPY PUT options for today by the time the reversal commenced.
Consistently Profitable Spy Put Trades
I get more than a few emails asking me how I can be so consistently profitable in the SPY PUT trades I do. The answer is extremely simple. I follow my two key elements described and I only trade the SPY PUT options when the conditions are perfect.
On Monday the market gaped down and then gradually recovered most of the day. That was not the kind of day to trade the SPY PUT options. Why make the job of trading more difficult and risky than it already is. Instead by trading on a day like today, where the S&P 500 did not plunge at the open but drifted for a while at the open, I am stacking the odds of success for my SPY PUT options hedge in my favor rather than the market’s.
SPY PUT OPTION LINKS
Internal References
Listing Of SPY PUT Trade Articles
Articles Discussing The Ultimate Oscillator
Other Articles On Trading Options
Understanding SPY PUT Hedge Strategy Part 1
(When I Can Watch The Market During The Day)
Understanding SPY PUT Hedge Strategy Part 2
(When I Am Unable To Watch The Market)
Understanding SPY PUT Hedge Strategy Part 3
(Short version using only ultimate oscillator)
External References
SPY PUT Option Chain
SPY ETF Home Page From State Street Global Advisors (SPDR)