***Closed***SPY (Standard & Poors Dep Rec) Bear Put Spread initiated on 17 Apr 2009
28 Apr 2009: Close Trade
Trade Type: Bonus Trade
Trade Summary
28 Apr 2009
SPY at 86.41 (+0.57)
17 days to May expiration
Action: Close Trade. Sell a bear put spread for May expiration.
Sell to close SPY May 87 Put
Buy to close SPY May 85 Put
For a net price of $0.85 Credit or better.
Profit or Loss: $0 per entry.
Analysis
It seems like nothing can stop the current bullish sentiment in the market. Not the fact that Citi and B of A need to shore up more capital, not the swine flu and definitely not the technical. Market has been holding on pretty well to their recent gains with no huge correction. Although we are not totally convinced that we’ve hit the bottom and this is the end of the bear market, we’re acutely aware of the pain to go against the current sentiment.
This trade was a bearish trade. After so many sessions of rallies, there is the widely expected correction or some called it the “inevitable retest of the lows”. This trade was entered to take advantage of such a move. Well, it did not happen.
Bad news after bad news, the SPY simply refused to pullback. That the government was preparing for GM’s bankruptcy, etc, etc. We have this funny feeling that we are right to be bearish (perhaps we were too early?), somehow, a pullback is going to happen soon. We don’t know how the market will react to the stress-test results but going by the view of things, the market is likely to hold up as well! A pullback will happen… or will it? This is one good reason to be a neutral strategist, save ourselves the agony of the bull/bear dilemma.
The problem with our trade was that we can’t wait for too long. To begin with, we intend it to be a relatively short-term trade that should be closed in matters of days. The only reason why we didn’t make a loss on this trade was due to the rise in the VIX. Our directional bet was wrong but the rise in the VIX helped.
Those of you who follow this trade closely would remember that there were a couple of days where we could have closed for a small profit. I believe there was once this spread was trading as high as $1.00. Well, we though that was the beginning of the pullback that we’ve been waiting for and being excited over our winning trade, we decided to let our “winning” trade run its course. A rally the next day made whatever small profits we had looked tinier.
So we decided, enough is enough, let’s kill this frustration once and for all. Better close now at breakeven than to close tomorrow for a loss. Everything was on our side to profit on the bear side but it was never meant to be. I guess we should just move on. Hopefully we can catch the next leg down when it really happens.
This has been a rough ride but at least we lose only the commission cost. *Phwee!*
Good trading,
Gary
*****Trade History*****17 Apr 2009: Initiate Trade
Trade Type: Bonus Trade
Trade Summary
17 Apr 2009
SPY at 86.79 (+0.35)
28 days to May expiration
Action: Buy a bear put spread for May expiration.
Buy to open SPY May 87 Put
Sell to open SPY May 85 Put
For a net price of $0.83-0.85 Debit or better. [All TOS auto-trade participants were filled at $0.85.]
Net margin required: $85 per entry
Analysis
This is our first official bonus trade. In the past, we have put up some additional trades beside the usual iron condors to take advantage to certain current market condition. But because there was no clear channel to share these trades with auto-trade participants. Now, with this bonus trade option, we can share with you some other trades outside the usual iron condors.
This is a short-term trade that we hope to close up once we can lock in a decent profit. This trade takes advantage of the imminent pullback in the coming days. Pull out a daily chart of the SPY and you can see that the SPY is testing the prior high of about 87. This resistance level may thwart any more advances.
Furthermore, the VIX is at its lowest level in recent times. And since we’re long vega with this spread, a rise in the VIX will be good for us.
As you can see from the P&L chart below, our breakeven point is at 86.16.
We believe this is a low-risk directional trade to take advantage of the current over-bought condition. We shall place a stop at 0.76 or 0.75, which is a 10% if this trade doesn’t work out. The key here is to be profitable quickly because time decay is working against us. But we’re hedging the theta risk by being positive vega. We’ll close up this trade when it trades at or below 0.75.
Our target profit must of course cover at least the commissions incurred. Going by the commission of $1.50 per option contract, we’ll need this spread to trade at 0.90 to breakeven. So this is will be the level we’re hoping for soon.
The maximum profit we can have is $116 per entry. But this is very unlikely because we are not going to hold on to this trade until May expiration. The maximum loss is $84 per entry.
We will continue to monitor this trade and look out for other new trades for May.
Good trading,
Gary
