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BlueCollarTrade (38.28)

Market Hedges in 3 Different Time Frames Using Options

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March 09, 2013 – Comments (2) | RELATED TICKERS: SDS , SPY , DIA

As the market continues to rise to all new highs of all time, I feel that the market can drop any day now.  Or will it take a few weeks?  Or does the run have another 200 Dow Points in it?   Who Knows?   Anyway, since I really don't know, I will put on 3 different hedges on 3 different time frames. If I am wrong, oh well, my bullish positions should be making me money at the same time.   I plan to use the Butterfly spread as my option strategy for the hedges.    See my earlier post on the Celgene Butterfly for more information on the Butterfly Spread.  

Here are my hedges: 

1.  Bearish SPY Regular Butterfly:  Using MARW4 Weekly Options(14 Days to Expiration as of today).  This was a shorter term hedge especially if today's job report was bad and the market sold off.   The market is continuing to show bullish strength,  so this butterfly will probably expire worthless on a short term rising market.  Using Put Strikes of 153-150-147.   I need the SPY to drift down to 150 in 14 days to achieve maximum profit.   This was my least favorite hedge of the 3, but the jobs report prompted my to open this position.  

2.  Bearish DIA Regular Butterfly:  Using APR Monthly Options(42 Days to Expiration as of today).    This hedge gives me more time in case the market drifts down in 42 days, or takes a sudden drop within the next 42 days.   My position contains the Put Strikes of 139-135-131.  I need the DIA to drop to the 135 at Expiration for me to realize maximum profit.  The position will make money on the way down, but not if the market has a "flash crash" below my 131 strike.  

3.  Bearish SDS Broken Wing Butterfly:  Using June Monthly Options(105 Days to expiration).     At this time, the May monthly options were not available for the SDS.   The SDS is an bearish ETF that is supercharged.  It should move 2 times in the inverse direction of the daily performance of the S&P 500.   If the S&P 500 drops as I expect it will within the next few weeks(My Crystal Ball says so), then the SDS will go up and this position will be profitable.    

My position was put on for a credit, and used the Put strikes 48-46-42.   I have more risk to the downside between the 46 and 42 strikes as this part of the "Broken" part of the butterfly.   The 42 Put strike is cheaper to buy than the 44 Put strike(which would have been used if this was as regular butterfly), giving the position an overall credit when opening this position.  I have yet to open this position and plan to on Monday, March 11th.   

Also, by using the June Options, I am covered if the often-stated, and overused  "Sell in May, Go Away" Cliche comes to fruition as it actually did in 2012.  

I considered using the VXX, which is an ETF based on the VIX, also known as the fear gauge, but passed as the VIX is less predictable(for me at least).  

I am willing to pay for these 3 different positions as insurance against my bullish positions, which allows me to sleep at night knowing that I am protected(not 100%, but at least somewhat) against a market drop.    

Options can be risky if you do not use them wisely or do not limit your risk.  If used properly, options can be used as a great hedge against stocks, or for speculation trades to the upside(e.g. buying calls) or downside(e.g. buying puts). 

I am long DIA and SPY options.  I do not have a position on SDS(yet).  

2 Comments – Post Your Own

#1) On March 09, 2013 at 2:30 AM, awallejr (79.54) wrote:

I like your play. I suspect the sell in May may come true since it has last 3 out of 4 years.  If not, October will scare me heheh.

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#2) On March 09, 2013 at 7:39 PM, BlueCollarTrade (38.28) wrote:

Yeah, if the market does not have a pullback and keeps melting higher into October, I will freak out too!    

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