Yesterday morning, I used the opening dip to come out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread at cost. This is being prompted by OPEC?s failure to reach a production ceiling once again.
The timing was fortuitous. An hour later, favorable inventory numbers delivered a 3% spike in Texas tea, dragging the stock market up along with it.
This allowed me to de-risk ahead of major market moving events:? the release of the May nonfarm payroll at 8:30 EST on Friday June 3, and the June 14 Fed interest rate decision.
This year, it?s all about risk control. Ignore it at you peril.
We had a nice profit in this position a week ago, before the dramatic short covering rally ensued.
Again, the hard earned lesson is to take the small profits as long as we are living in a 5% trading range. Pigs are getting slaughtered by the pen full.
This year, it seems like every market move is intended to cause maximum damage to hedge funds, regardless of the logic. From here, that means stocks could go up just enough to trigger another wave of stop loss buying, and then fail again.
A summer swoon is still in the cards, especially if the Fed raises rates in June.
Humans would be mad to buy stocks up here at the top of a two-year trading range, but machines don?t care. That is giving us our added upside volatility.
Either way, I?d rather watch from the sidelines for free. The algorithms will take advantage of the poor summer liquidity to whipsaw prices as much as they can, capturing as many pennies as possible.
If we do get an extreme move worth fading, I?ll re enter the trade. If not, then I?ll stay in cash awaiting another soft pitch.
A good rule of thumb in 2016 is to wait an extra day before strapping on a new position. Prices move more than you expect, even though it is not reflected in the Volatility Index (VIX).
The small profit we eked out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread offers a perfect illustration of why we execute put spreads.
We got the market and the timing wrong; yet,we still got out whole and lived to fight another day. When we executed this short position, the (SPY) was at $206.58.
Some 13 trading days later, the (SPY) rose 1.56% to $209.80, yet our put spread rose in value from $2.51 to $$2.55, making us $96. Some emails I received from followers indicated that they got executed as high as $2.61! All the money was made in time decay.
I love strategies that make money when you?re wrong!
The SPY June, 2016 $212-$217 in-the-money vertical bear put spread was a bet that the (SPY) would fall, move sideways, or rise modestly into the June 17 expiration. That?s exactly what we got.
Because this is a hedged option position, the minute-to minute price movement is small enough to enable readers to get in and out even accounting for transmission delays posed by the internet. You don?t need to live your life in front of a screen grasping for pennies.
You also have clearly defined risk. You can?t lose any more money than you put in. And if Armageddon hits, time value assures that you can always recover much of your investment.
I?m starting to wonder if the June 14 Fed meeting will be the last bout of volatility in the market that we see for a while. The doldrums are here for the summer, and the attractive trades in any asset class are few and far between.
