Monday, August 30, 2010

SPY Weekly Trade

Heading in to the week I was short-term bullish, but since I already had bullish exposure via naked puts on MCD, AKAM, PM, and naked calls on VXX, I was content to just sit on what I had and not take on any more bullish exposure. It turns out the market doesn't care what I think and when SPY failed exactly at the trend line today I waited a bit to see if that held. I ended up shorting (20) SPY 110 Weeklys at .10. The odds of finishing ITM were less than 10% and return on BP is (200/9000) = 2.2% for 4.5 trading days. I'll take that risk. We would need a greater than 4% move before I start to incur losses. If that happened I would look to roll the trade and sell more OTM SPY calls or maybe even a weekly call spread for next week. We've been in a down trend channel all day since hitting the longer term downtrend.

Trade Update 9/2/10
I've most likely got my hand caught in the cookie jar here. Though these weekly options that expire in less than 24 hours are still .50 OTM, the trend up is currently squarely against me at the moment. I don't however want to close out early and pay for something that will be worth nothing literally in 22 hours. So this is going to be a last half-hour decision if these are ATM or ITM. If ITM, it will depend on by how much. My preference would be to roll them out a week and up another strike to 111. Depending on what prices are at the time of decision, I might also walk them out two weeks and two strikes to normal SEP OPEX at 112. If I had to take on a short position I would feel  much more comfortable shorting near the top of this range. If the range broke above 113 I would most likely have to stop playing this game and take a loss. Below are the option chains for the week that expires tomorrow, next week, and the SEP OPEX. As long as we don't finish at 110.50 or higher tomorrow, I'm comfortable with my options of walking these out. If tomorrow is a big up day I might be stock with a short position, we will see. The good news is I dealt with this same situation last month so this time it's not screwing with my head nearly as much. 

Trade Update 9/3/10
Today has been a wild ride as there were times this trade was very negative, and times it was set to expire worthless or slightly profitable. My preference would have been to take a small loss and end it, but I wasn't afforded that luxury. At 110.30 I rolled half this position out to next week and up two strikes from 110 to 112. This was a break even transaction so I bought myself some time and some upside. I'm much more comfortable being short at 112 than 110. However, I bit off more than I was comfortable with once the position did get in trouble, so I cut my size in half and took a loss on the other half. I paid .82 to close these out when SPY was at 110.77 roughly. The trend was up all day since retracing half of the gap open. The opportunities for walking this trade out to next week got less attractive the higher SPY went. So I've booked a loss of -720. Certainly not happy about it but it's not a game changer. It will just dent my monthly gain down to something not so attractive. And I've still got risk out there on this with 10 short at 112. This was my first foray in to weekly options and it was something I had been wanting to dabble in. I already know that had these expired worthless I would have done it again, and again, until I got burned. So in a way getting burned big enough to hurt and slap myself on the wrist was good. 

There is also another learning experience. Part of the reason I wasn't afraid to short weekly options was I felt my prior experience being short and looking for ways to managed the position and later analysis of that trade, had somehow better prepared me for when it happened again. So yes I can completely hedge this trade with getting long the ES, however, that also comes with additional risk. Check out the chart below. This morning I was left having to gamble on if I should do a preemptive move and buy ES to hedge before the unemployment number came out. I felt this was foolish as I have zero idea what the numbers would be or how the market would react to it. And once they were announced there was no longer time to hedge and we jumped 10 points which effectively took the SPY from 109.50 to 110.50, from .50 OTM to .50 ITM. So lesson learned, on this particular type of short trade the risk isn't worth the reward as once it becomes an actively managed position with hedging it also comes with additional risk. I should stick with defined risk/reward trades as this fits my personality style more. I can always size up or down and make that defined risk/reward large or small to fit my appetite for risk.


  1. I updated this post with some new pictures.

  2. Have you decided what you are going to do yet?

  3. I just updated the original post with what transpired today.

  4. Like you said lesson learned. This market acted much stronger than I would had expected and I think there could be some continuation next week or this could be that higher low that I have been preaching about. In one of my earlier post I had highlighted what I think the market might do and the series of lower highs that the market had made.

    I forecasted that 1100 on the /ES or $110 on the SPY might be that next higher low. This will be a thesis that I continue to watch as the price action un folds the true story.

    If that does not hold then we may be headed up to test that 113 level.

    I just listened to Tos Sosnof's weekly talk from last Friday and he predicted everything to a T that happened this week. He seeems to be bullish equities through September expiration (triple withcing).