Trade Alert – (SPY) September 17, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Trade Alert – (SPY)

Stop Loss-Sell the S&P 500 SPDR (SPY) October, 2012 $138 puts at $0.47 or best

Closing Trade

9-17-2012

expiration date: 10-19-2012

Portfolio weighting: 5% = 11 Contracts

When you buy insurance and your house doesn’t burn down, don’t complain. That’s what I tell investors when they buy downside protection for their portfolios, which later proves unnecessary.

That has been the case with my S&P 500 SPDR (SPY) October, 2012 $138 puts. These are now far out of the money, and it is unlikely that they will recover given Ben Bernanke’s announcement of QE3 last week. The September sell off has been banished to fantasy land.

So I am going to recover what time premium that I can by coming out here. That was the advantage of going with the longer October expiration with the initial trade. I still have a fig leaf of value to hide behind. At least there is something to recover before it goes to money heaven.

Total Loss: $4.50 – $0.47 = $4.03

(100 X $4.03 X 11) = $4,433, or 4.43% for the notional $100,000 model portfolio.

It is a big help to our performance that I made a ton of money trading against this position on the long side with Apple (AAPL), gold (GLD), Treasury bonds (TLT), and other positions. The huge gains on these positions far offset the losses in the (SPY) $138 puts. After I took out the (SPY) $138 put insurance policy, I was able to close 17 consecutive profitable trades. Beat that!

Another mitigating factor is that I was able to substantially reduce the cost of the $138 puts by selling short farther out-of-the-money options positions against it. Here is the total P&L:

-4.43% Loss on $138 puts
+0.88% Gain on the short October, $137 puts
+0.81% Profit on the Short September, $147-$153 Call spread
-2.74% Net loss

Gone to Money Heaven