Option Strategies I Used to Protect My Trades This Week

Option Strategies I Used to Protect My Trades This Week

Posted On November 13, 2020 1:50 pm

It was a wild week! On Monday morning, the Dow Jones Index (DIA), S&P 500 (SPY), and Russell 2000 (IWM) all surged by 5% on news that Pfizer’s (PFE) Covid vaccine had shown 90% efficacy. Meanwhile, the tech-heavy Nasdaq (QQQ) which had outperformed those other benchmarks, actually fell 1% as investors rotated out of the stay-at-home plays and into sectors such as restaurants, airlines, hotels, and financials that’ll benefit from an economy re-opening. 

Monday’s gains came on top of the prior week’s pre and post-election rally, which saw the SPY post a whopping 8% gain — one the best weeks on record. However, all the indices closed at session lows and declined the following day, leaving a large bearish-engulfing candle on the charts. It also created a double top, leading me to also wonder if we witnessed a massive blow off and the ultimate ‘sell-the-news’ reaction to the news of a vaccine?  

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sp 500 large cap index

I had felt the pop in numerous restaurant and hotel stocks being overdone, leading me to establish bear call credit spreads, which I discussed on Wednesday, in names such as Brinker (EAT) and Planet Fitness (PLNT) which I was able to close the next day for profits as the stocks retreated. 

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But, before Monday morning’s initial surge started abating, I was forced to take defensive action in the SPY and QQQ iron condor positions I’d established prior to the election.  The positions’ had been working from a volatility standpoint in that implied volatility had declined significantly following the election, but not from a directional standpoint.  In fact, they were now starting to show losses as the call side of the position was now at-the-money.  Remember, an iron condor you want the underlying to stay within price range.  I had not expected the SPY and QQQ to go up some 13% in a nearly straight line.  

The action I took was two-fold, first I rolled up the position’s put side to collect additional premium, thereby reducing my risk. The trade-off is having a smaller range, from 340 to 365 in the SPY and 275 to 298 in QQQs, where positions will profit.  Secondly, I established low-cost bullish butterfly spreads as a protective hedge in case the SPY and QQQs continued to rally.  These were really just insurance policies or, as I wrote in the member alert, “We might end up sacrificing this $50 as a pawn for the greater good.”   

Indeed, the butterflies will expire worthless today. However, they indeed served their purpose. I was able to stay in the iron condors which have now moved back into the profit column.  As we head toward next Friday’s expiration, time decay will accelerate and the positions will reap the benefit.  Here’s to a relaxing weekend and hopefully a calmer market next week!

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.