+64% in SPY Put Spread – Now What?
Good evening traders.
While the S&P’s are pausing here today, the larger question is:
‘How much longer can the headwinds be ignored?’
A little clarification though. There are indeed both technical and fundamental headwinds. But there remain technical and fundamental drivers too.
At this point in my career I learned that fighting the trend is never a good thing, but having a generous does of scepticism will reduce the odds of a blow-up quite a bit.
As of now, I can think of several data points I have come across recently that suggest near-term caution:
- The US is nearly at a negative yield environment. Inflation and 10-year Treasury rates are both at 2.5% – not a good metric for equity returns going forward.
- The S&P’s are 2 standard deviations above 10, 50 and 200-day moving averages. Historically 1 week and 1-month returns forward on average were negative
- The wave count puts us currently in a Wave 4 correction lower and suggests we could see prices test 2326-2309
- A very accomodative Fed
- Low volatility
- The indexation of the money management industry
- Lumber prices rising
…the trend remains up, albeit a fragile one.
I closed out the SPY Put Spread yesterday and that was a good call – a gain of +64%
So while I did not get my maximum gain of $771 per contract (I had 10 contracts) I did manage a gain of $557 per contract and that is respectable.
You might ask why I closed it.
Pretty basic. While it is always tempting to go for the throat, I always try to re-evaluate a trade as it unfolds.
- Would I start a new position from these levels or add to an existing one?
- Is it unfolding in the way I had expected?
- Is there new information that impacts my initial thesis?
The answers in this case were: No, Yes and Yes.
Fast forward to where we are now, I think we may well have another opportunity to get long SPY via the ETF or yet another option strategy but I will not know for certain for a few days.
How prices unfold lower, where they find support and how they react from those levels will be key in determining our next trade.