The SPY has decided to take a hard tumble and it dipped over the night to the second threshold that I thought it would (if it decided to tumble). I basically made some assumptions based on Tuesday's data for Wednesday's performance.
I thought that if the price were to drop on Wednesday, it would be a selling opportunity for a Put Spread. It did drop last night, and true enough, it was a selling opportunity. The question now was till which threshold would the price drop to? I have set two price benchmarks for it to drop to and then I would consider an entry into the market.
I was looking at $144.83 as the first benchmark, and if it didn't cross over, it would mean that the support was there. It barely touched that line and bounced back up. I decided that it was a good opportunity to sell that trade and only managed to get the pair 141.5/142.5 at $0.08 premium.
It was a good trade. Ceteris paribus of course. All things must remain constant, that is, price must continue to climb and return at least to normal ranges.
Unfortunately the SPY has dropped to my second threshold for the night and it is at $144.29 with a drop of $1.08. You may be wondering how I came about with this magic number. It is quite simple really. I merely divided the candlestick from the previous day into three parts.
So if the SPY were to drop $0.54 cents to the first threshold, I would sell an "easy-way-out" trade. If it continued to drop, to double that at $1.08, I would also want to sell an even lower and perhaps safer spread, with the same premium of 0.08 cents. But as I am in Singapore, and as it was already past midnight, there was no way I am going to sit through the entire night eyeballing the market. I still have a day job. :)
So I made a choice and took the dive at 12.11am Thursday morning. Admittedly I took more risk than needed when I sold the trade. I had an almost blind kind of faith in the fact that it would actually bull doze upwards towards the end of market trading day. I entered the market when the price dropped recovered to -0.09 cents.
Of course, I went to bed, and the SPY proved to me that my thoughts and assumptions were all wrong. Haha.
So now that the trade has gone south, what's left for me to do is to monitor the premiums further and to hope that it doesn't cross my conservative 4 times of the premium sold. Basically looking at the trade this morning, it says that my trade is valued at 0.19 cents. This refers to the current premium that my spread is worth. If I were to divide this by 0.08 cents premium sold, I will get a ratio of 2.375 times of premium sold.
That's an indication that I should be prepared for a situation of cut loss tonight when the market opens. Cut loss here mean "close-my-eyes" and get out of the trade (also have to mentally cut off my emotions as well). As it is still within the thresholds of my cut loss strategy, and coupled with the fact that there is still time decay working in my favour, I am hoping for a reversal tonight and a confirmation that my theory is proven correct.
My theory is, if price were to drop more then two thirds of the candlestick the day before, it is likely to continue to go downwards the next day. It did an day low of $144.24 which was enough in my opinion, but because I was sleeping at that time, I could do nothing. Not that I would be doing anything either. There is still a buffer of $1.79 before it breaches the $142.5 strike price, assuming that the SPY is to continue to dip tonight.
Let's keep our fingers cross and hope for a reversal tonight. :) Otherwise, it might be safer to cut loss and come back again the next trading week.
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