Just 10 days ago, but what seems like an eternity in our current news cycle, Dan checked in on the SPY and detailed a hedge for those looking to protect gains into the inevitable market correction. Here was that trade, from Dec 14th and some rationale:
SPY ($261.25) BUY FEB 260 / 220 PUT SPREAD FOR $7
-Buy to open 1 Feb 260 put for $8
-Sell to open 1 Feb 220 put at $1
Rationale: this hedge idea risks a little less than 3% of the etf price for downside protection down 15%
Disclaimer: I think it is important to consider that the while the SPX is in correction territory (it has just given back all of the gains of two rallies this year and dug into a little of last year’s nearly 20% gain), it is not a disaster yet, unless you got loaded long at the highs. So the idea of being tactical into a very uncertain time as it relates to China trade and the future of this presidency makes sense to protect a portfolio of stocks.
With the SPY now down significantly, to 239, this hedge is worth $19.50-ish, from the initial $7 cost, protecting a good bit of the down move. As far as trade management, it may make sense to roll the long put lower soon (for instance, selling the 260 and rolling it lower to the 245), to lighten short hedge deltas into any counter-trend rallies which could be sharp. A good rule of thumb is that when a hedge is initiated and is for instance 25 deltas, but with the move lower is now worth 75 deltas, it makes sense to re-calibrate that hedge a bit. Otherwise, this hedge is in really good shape and has been a god send in a massive move lower compared to the low vol setting we normally see into the holidays.
As far as what’s next? With the VIX above 30 the prospects of big moves in the SPY over the next 2 months has jumped. And that 220 leveling happening by Feb expiration now looks a lot more plausible than it did just weeks ago: