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Buy the SPDR S&P 500 (SPY) March, 2014 $189-$192 bear put spread at $2.67 or best
expiration date: March 21, 2014
Portfolio weighting: 10%
Number of Contracts = 37 contracts
Let me give you my thinking here. I am a long-term bull, expecting the S&P 500 to be up 10% or more to over 2,000 by yearend, and possibly 20,000 by 2030. But yearend is a long time off (even though every year seems to go by faster).
We have just had a massive 11 point pop in the (SPY) during my two week trip to Australia. So a period of digestion is called for.
The SPDR S&P 500 March, 2014 $189-$192 bear put spread has a breakeven point of $$189.33 on the upside. If the (SPY) anywhere below this on the March 21 expiration you make money. If the (SPY) closes below $189 on that day you get to keep the entire $1,221 profit.
My (BAC) March $15-$16 bull call spread is now naked long, so a little bit of downside protection is justified. Keep in mind that this is only a partial hedge, not a full one. But the additional potential profit from this SPDR S&P 500 March, 2014 $188-$191 bear put spread does lower the breakeven price of the (BAC) position by a respectable 46 cents.
The present dynamics of the market favor this trade. All of the action is now in speculative, momentum driven names like Tesla (TSLA), Netflix (NFLX), Facebook (FB), Priceline (PCLN), and Yelp (YELP), which are not even in the (SPY) index. The big leadership names, like financials (XLF) and energy (XLE) are pretty much dead in the water. As long as this is the case, don?t expect any big moves in the (SPY).
And with a short dated March 21 expiration, we only have 15 trading days where we need to be right on this.
As a rule of thumb, don?t chase this spread trade if the price has already moved more than 2% by the time you get the Trade Alert. Just put in a limit order and if it gets done, great. If not, wait for the next Trade Alert. There will be plenty of fish in the sea.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the trade to come to you. The middle market is the halfway point between the bid and the offered prices that you see on your screen with your online broker.
The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit. Keep in mind that these are ballpark prices only. Spread pricing can be very volatile especially on expiration months farther out.
Here are the specific trades you need to execute this position:
Buy 37 March, 2014 (SPY) $192 puts at??.????$7.24
Sell short 37 March, 2014 (SPY) $189 puts at??..?..$4.57
Profit at expiration: $3.00 – $2.67 = $0.33
(37 X 100 X $0.33) = $1,221 or 1.22% profit for the notional $100,000 portfolio.