Spy Put Options And Why You Must Stay With The Trend

Mar 22, 2013 | SPY ETF Hedge Strategy (SPY)

I have been receiving a lot of emails from investors who have been accumulating Spy Put Options as they wait for what their perceive as the “inevitable crash” as one investor wrote me. I believe accumulating Spy Put Options every time the market moves lower is a mistake and could hurt portfolios. First, if you are convinced that the markets are going to crash then you want to buy Spy Put Options every time the market rises. That way you have at least some fighting chance to maybe make a bit of money when the market pulls back.

Spy Put Options Basic Trading

Below is a chart of the past 10 days of trading in the Spy ETF. Investors that have emailed me keep buying on the wrong side! If you are “accumulating” Spy Put Options for what you believe is an inevitable large pullback, you want to buy your Spy Put Options at the top end of the market not the bottom. Do not buy your Spy Put Options on the days when the market is falling. Buy your Spy Put Options on those days when the market is rising.

Past 10 days of trading in the Spy Put Options

It is understandable that investors are buying their Spy Put Options every time the market direction turns down. Investors tend to buy and sell through emotion. These investors emailing me are buying and selling on emotion and it is obvious. On down days they jump in and buy even more options to add to their growing pile.

The problem here is that this pile of Spy Put Options are being accumulated on down days when Spy Put Options premiums are higher! If you believe that the markets are going to “collapse” then at least help out your portfolio by buying on days when the market is up. On up days or even on up market direction moves intraday, you wil be paying less for the Spy Put Options. That way IF you are WRONG and the market direction does NOT collapse then your losses are going to be less.

How I Use The Spy Put Options

For anyone interested, I would NOT be accumulating Spy Put Options during this present period. Even if I am wrong and the market direction does indeed enter a more severe correction, there will be plenty of opportunities to be making profits in any correction. Those who follow my Spy Put Options Hedge know that I can easily buy Spy Put Options when the trend is clearly down which means I am placing the odds of a successful trade in my favor, rather than trying to GUESS that the market will correct.

The market direction may NOT correct lower. So far the markets have shown very strong resilience here even though if you look over the past 10 days in the S&P 500 you can see that the market direction is in definite trouble. But bull markets enter periods like what we are experiencing and then suddenly turn around and take off to the upside.

Instead of second guessing the market direction, I prefer following the trend. The trend right now is not clear and I believe it is far more prudent to only trade within the Spy Put Options when you have stacked the odds of success in your favor and that means for those who are “convinced” that the market direction is down, at the very least, buy the Spy Put Options at the top of daily movements and NOT at the bottom. Put your emotions on hold and realize that the market direction is stuck in a whipsaw action at present and each time the market direction falls, try to refrain from jumping in just because you are convinced the market “this time” will “collapse”.