Trade Update $SPY: Options to Consider on Weekly Put Spread

by Dan December 10, 2012 3:03 pm • Commentary

Trade Update Dec 10th, 2012:  Almost 2 weeks ago when it seemed like the month of December was going to be littered with daily price swings related to the horse-trading in Washington and the dramatic media coverage of a potential compromise on the “fiscal cliff”, I bought a  near the money SPY Put Spread that would cover the first half of the month, targeting a move back to the Nov lows.  

Now here I am 2 weeks later, with the SPY up a mere .40 as I write, but the spread has lost almost 2/3rds of its value as time is starting to quickly work against me.  So let’s review my options:

1. Close position for a loss, with almost 4 trading days left to the Dec14th weekly expiration. This does not seem like the right thing to do, with the SPY at 142.40, I can sell the put spread at .38, or .57 less than what I paid.  I think the chances that the SPY is below 142 at some point in the next couple days is pretty decent and I would feel like a Schmo for closing it.

2. Roll up my short strike and lower my break-even on the trade.  With the SPY at 142.40, the SPY dec14th 136 put that I am short is offered at .05, while I think there is basically little chance this options ends up in the money on Friday, if I were to sell a higher strike put, I would need cover the 136 put as no real sense of being short on a ratio.  The only other problem with rolling up is that there isn’t any real premium on the Dec14th 140s, 139s or 138s that justify rolling up.


3. Roll out to Dec31st quarterly and give myself more time.  IN this scenario I would close this weeks put spread and look to recoup the lost premium of this trade by expressing the same view and giving myself a couple more weeks to be right. Obviously I would layering on more premium to what is also a losing trade, so to do this I need to have more conviction of a sell off than I did 2 weeks ago.

SO NOW WHAT? Given the available options above, I’m going to sit on it for now and wait for at least one down day, at which point, I’ll have to make a decision based on whether that’s a gift to get out at a smaller loss or small win, or if it’s the start of something bigger.




Original Post Nov. 29th, 2012:  New Trade $SPY: Cliff Outcomes Will Be Clear As Mud For The Next Couple Weeks

After the nearly 6% rally of the last 9 trading days , the SPX is now down less than 4% from the 52 week highs made in Sept.  While the investment community appears squarely focused on the potential outcomes of the ongoing “fiscal cliff” debate, the last 2 consecutive quarters of disappointing corporate earnings suggest a whole host of challenges facing a continuation of the SPX’s near 13% ytd gains,aside from our fiscal policy.  

Sentiment shifts have been plentiful in the last couple months, and our sense is that playing the ranges makes sense for the next few weeks. I want to make a short term bearish bet that we get another such sentiment shift back to the recent lows near 1350 as the outcome to the “Cliff” increasingly becomes clear as mud, so to speak.  The following trade could be viewed as an outright bearish bet, or one to be used as protection against other longs during what could be a volatile couple weeks.

Trade: SPY ($142) Bought the Dec 14th 141/136 Put Spread for .95

-Bought 1 SPY Dec14th 141 Put for 1.25

-Sold 1 Dec14th 136 Put at .30

Break-Even On Dec14th Expiration:

-Profits btwn 140.05 and 136, make up to 4.05, max gain of 4.05 136 or below.

-Losses up to .95 btwn 141 and 140.05 with max loss of .95 above 141.