Trading the SPY with Swing Trades (Part 2)

In the last post, I described a safe way to trade SPY when a trading range has been identified. The recent low of about 187 was tested and held. Since then the market has traded up and up. How should it be traded?

Range, volume, price

First, let's review the swing trade. The time to take a position with SPY is when three criteria are met: range, volume, price.

Range. A range in prices occurs when the market runs out of sellers and needs to rise to attract buyers, or runs of of buyers, and needs to rise to attract sellers. When the boundaries of the new range are known, then we can more safely place trades. During the August meltdown, the lowest close was about 187.50, but this low was never touched until the end of September. On the high side, SPY hit just over 202, as the market ran into resistance and quickly fell away. That set up a clear range.

Volume. Increasing and then decreasing volume usually confirms a reversal in prices. Notice how the downside volume bars increase from a low of about 1,000,000 to 5,000,000 SPY trades--a five-fold increase, followed by the first bounce to about 198 which forms the first top to the range. Not surprisingly, the market has spent most days with the SPY around 195-198.

Price. By price, I mean the price of your options--not the stock. As we use deep ITM Puts and Calls as primary SPY tools, then we are placing these when the stock price moves to the edges of the current range. See "Trading the SPY with Swing Trades (Part 1)" By looking at the volume and the VIX, we receive confirmations that it is time to take new positions.

(More on the swing trade with SPY, in a previous blog.)

What to To Do In the Middle

We found success by adding short straddles at 195.5 - 197.5 when the market is not moving either up down strongly. Fortunately, options premiums are sufficient to assure good profits so long as the Friday close stays in the middle of the current range. On low-volume Thursdays and Fridays, we have made money with Butterflies and short straddles.

EXAMPLE: When the 195.5 Straddle offered $4.10, we sold it with protection at the edge of the range (190 and 200). Our break even points were quite wide, near the edges of the current range. This assured profit so long as the stock remained between 199.9 and 191.4.

The Swing Up and Way

Once the 187 level was tested and held, a gap in the chart and buying volume signaled that we were heading higher. We sold the SPY 220 Puts with insurance at the recent lows and expected the index to rise toward recent resistance (around 202.5) and then head to the all time highs around 212.50.

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Go to the next blog for a SPY update as of Spring 2016.

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CREDIT: End of the World: This photo, taken at the 'end of the world' swing in Banos, Ecuador, captures a man on the swing overlooking an erupting Mt. Tungurahua. The eruption took place on February 1st, 2014. Minutes after the photo was taken, we had to evacuate the area because of an incoming ash cloud. Location: Banos, Ecuador (photo and caption by Sean Hacker Teper. The photo was horizontally reversed.) Read more.

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