I know the title sounds a bit bold, but stay with me. Where is most of your money stashed? I’m not trying to get personal, I promise! But for most of you, I bet it’s in your retirement account. Another question, will the stuff in your retirement account be happy if the market goes up or down?
The answer for most of you is up!
Your portfolio has a strong bullish bias for the majority. 2008 hurt so much because most of your assets were in the market when everything fell apart between September 2008 and March 2009 ( 8 months of torture).
Do I know something you don’t know about the market? Of course not.
What I do know is that your portfolio is probably leaning long, the market is in the upper end of the range, and I’d personally like to start having a few puts around.
I’m going to focus on the SPY. Currently trading at 131.54. The 1,2 and 3 year high is around 135. You still have to respect the trend, which is up, but I’m starting to get some bearish soldiers ready to help out all my bullish soldiers who are getting a bit excited about the upside.
SETUP: Because the trend is up I would scale into some puts. What does that mean? If my size is 9 contracts, I might buy 3 to start , then buy 3 more maybe at 133 in the SPY, and work up to 9.
STRATEGY: With SPY at 131.54, I might start nibbling and buy the March 127 puts at $2.00. Why March expiration? I want to give myself time and the option premiums are cheaper than they usually are. March is over 50 days from expiration. Nibbling means buying maybe 30% of my intended size.
You say, “Dan, the March 127 puts are trading at 2.28, how are you going to get $2?” There is a phrase that says “let it come to papa”. What does that mean? It means if the market is in a bit of a trend don’t be aggressive with the price. When would this order get executed?
Probably when SPY hits between 132 ½ and 133. I might use a GTC order when entering this trade. What do you mean? Because I am entering my price below the market, it make take a few days to execute, so a good till cancelled order means my $2.00 bid will stay active and I don’t have to put in a fresh order every day.
What if the market goes down before I make my put purchase? We miss it! That’s part of the game. This is more of a passive put purchase plan, if I wanted to be more aggressive, I’d pay more. I’d be a little passive, respecting the trend.
Indicator to Watch
If VIX hits 24-25 area, start evaluating your retirement account to see if you need some downside help. Not going to really elaborate on the VIX today, and don’t want you to stop enjoying the upside bliss. But I want you to be aware of when the wind might be changing to the downside. Remember Mary Poppins ! 24-25 area would be an indicator the market is starting to move down, but not out of control yet. Merely a warning worth looking at!
If the trade goes against me, I will discuss a few adjustments I usually use to fix a put gone bad. Have a great day!
And please see our options trading for beginners page.