Monday, July 12, 2010

Update of SPY position into OPEX

As we all know this week is options week as well as the kick off to earnings season with Alcoa reporting after the bell. Two weeks ago the price action in the market made you feel like the world was getting ready to end again, but then last week I think surprised a lot of people. I think a lot of people expected a bounce but not as big of a one that we got. The SPY bounced about 6-7% in three sessions. I am not really sure what to make of the price action, but I am still holding my ground and am prepared to make adjustments as necessary.

Anyways first I want to put an updated chart of for the SPY with my range of profitability that I originally posted:

We are approaching the upper end of my range. I will admit I am a little uncomfortable but still remaining calm as I have a hedge in mind at SPY 109 that will stop my losses. But first lets look at my current P&L graph and risk profile:

I went through many iterations to try and come up with the best hedge possible. First off let me start off by saying that I need a hedge that will give me at least positive deltas to be delta neutral at SPY 110. This is where the 50 day MA is and is where I think the risk is to the upside. So with my analysis I have concluded that buying deep ITM call options would be the most effective and efficient use of capital. As my capital is limited it is not feasible for me to just go and buy the underlying to hedge my deltas. Not that I would if I had a less capital intensive way to accomplish the same goal.

Anyways onto the hedge. I have modeled my portfolio by adding 9 July '10 98 calls. Which basically gives me 900 long deltas with SPY above 107. This moves my break even on the downside to about 106.76 and 109.68, and I start making money past the 109.68 point and potential is unlimited to the upside. Here is a look:

Now two questions:

1) When do I put the hedge on?

I would add the hedge with the SPY trading at or above 109 which is about .15 above my current break-even at 108.85. I will re-evaluate the amount, but currently I would look to buy 9 deep ITM 98 calls.

2) When do I take it off?

I would take the hedge off on the downside at about SPY 107 which would lock in a loss of about $950 on the hedge but still in the sweet spot of my range of profitability. If it expired around 107 I would still gain to make about $350. Below this my max loss is about $600.

If it were to rally up again then I would look to put it back on at the same spot of about SPY 109.

I will keep you updated. 


  1. I am in a similar position. I eventually decided to get long 2 ES contracts should they hit 1082 or higher, this correlates closely to SPY 108.50, which is my B/E point. I am having the same contemplation of when to put it on and when to take it off. So I decided on when to put it on, I am planning on taking it off should we pull back to the short strike on my call ratio at 107. All this does it cuts my losses in half going forward, but it also eats in to profits should we pull back. I did not want to do a 100% hedge as a pull back could actually end up taking me negative. I've been looking to get out of this trade for a week and the market hasn't given me the chance. My second exit point is potentially when/if we hit the upper resistance. If we break it and thus stop the cycle of lower highs, then I'll probably keep it on until expiration. I don't know, not having an exit point for this trade from the start has proven a disaster as I'm still uncommitted on what to do. Nice learning experience but unfortunately it's going to cost me money this month.

  2. Ok, So I put the hedge on this morning by buying 10 101 Call Contracts. I sold with SPY near 109.72 for a $600 gain. The market has shown great strentgh and has rallied to new highs on the days since pulling off the hedge. I am now ready to admit I was wrong and take my losses. I am now fearful of the upside momentum of the market and I think the prudent thing to do is take my lashing and get back to a place where I can think rationally. So I am now flat and in 100% cash going into the close.

  3. Looking back at March there was a streak of 11 strait up days. We are only 6 days up in a row now...just something to think about.