Wednesday, June 23, 2010

SPY directional play/hedge

I just put on the trade below for July OPEX. I really wanted to put on the August for a few hundred bucks less and give myself more time, but in case we crashed soon there was no payoff and my break even on risk to the downside was at a higher strike. This will allow me to sell some put spreads on names I like if we continue to sell off and have a hedge in place. This was the first debit trade I've done in a while, it felt uncomfortable. I almost feel as if I need to sell something in to this to pay for the trade. Theoretically I have unlimited risk but I would close this out way ahead potentially taking a loss. My real risk is a huge overnight move that doesn't allow me to get out conveniently.

Here is the August profile


  1. So you are putting this in place to essentially get long other names via selling put spreads. I like this idea better than the out of the money butterflies that IWO wants to keep buying as a hedge. It only cost you $420 and if we to indeed crash below support levels you look to profit nicely.

    Are there any other plays you have in mind to add soon since initiating this trade? I also see that if the market was to move really fast to your area of max profit at the 95 strike on the SPY that you would only realize about 20% of your max gain of $5000. So it is probably better that you did the July '10 options rather then the August options. With August you would basically be break even at $95 on a quick move down.

    As a hedge I like this. But as a directional play I would had gone closer to ATM options for a higher probability of success. For example if you bought 10 108 puts, sold 10 99 puts, and sold 6 105 puts.It would cost you about $880 (double your suggested play), but it gives you a higher probability for success.

  2. I don't view the $5,000 as a possible reality. I just liked the slope of the line up as the market falls. In a large quick move down this isn't a great play. But I didn't like the price of just buying straight puts. It was hard enough to put on a debit play. I don't have any other trades in particular I plan on putting on soon, but I wanted to have something in place in case I do. That's why I called this a directional play/hedge. I'm comfortable with the debit outlay as a directional play but it will serve as a hedge if I do find a put spread I want to sell.