Tuesday, July 6, 2010

SPY hedge update

This play is no longer a hedge as I've closed out all the downside risk I face. At this point with only 8 trading days left I'm going to alter the trade. Below is the before and after risk profile. All I'm going is closing out 4 of the long 104 puts. This leaves me with a 6-lot 104/101 long put spread and 10 naked 95 puts. What's interesting about my remaining inventory is the way you view it. I originally had on ratio put spread, followed later by a ratio call spread. With the remaining make up I essentially have a long put spread, long call spread, and short strangle at 95/107. What's also interesting is it looks like the area around 103-105 is a dead zone where little to no profits can be had. But keep in mind that is only an at expiration diagram.

The last slide is two days before expiration where you can see that that area is actually almost as profitable as anywhere else in the analysis. I do plan on exiting the trade by the end of trade on the 14th as I'm on a plane the 15th and not available to trade on OPEX the 16th. So why is that dead zone profitable with only two days to expiration? Because in essence if we're trading in that range with only a few days to go, look at the inventory again and you'll see that what I would really have left at that point is a 104 long straddle. Very interesting how all the different strategies kind of blend in together and as time expires they essentially morph in to something else whether that was your original intention or not. The whole trade can also be looked at as one big 93/108.50 short strangle. This leaves me with room to run of 5.3% on the upside and 9.7% on the downside. This is comfortable with me as my view is still bearish. These ironically enough are right about where the channel lines are as well.

Before Adjustment

After selling 4 of the 104 long puts

Two days before expiration

SPY Chart

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