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Update of SPY position into OPEX

As we all know this week is options week as well as the kick off to earnings season with Alcoa reporting after the bell. Two weeks ago the price action in the market made you feel like the world was getting ready to end again, but then last week I think surprised a lot of people. I think a lot of people expected a bounce but not as big of a one that we got. The SPY bounced about 6-7% in three sessions. I am not really sure what to make of the price action, but I am still holding my ground and am prepared to make adjustments as necessary.

Anyways first I want to put an updated chart of for the SPY with my range of profitability that I originally posted:


We are approaching the upper end of my range. I will admit I am a little uncomfortable but still remaining calm as I have a hedge in mind at SPY 109 that will stop my losses. But first lets look at my current P&L graph and risk profile:



I went through many iterations to try and come up with the best hedge possible. First off let me start off by saying that I need a hedge that will give me at least positive deltas to be delta neutral at SPY 110. This is where the 50 day MA is and is where I think the risk is to the upside. So with my analysis I have concluded that buying deep ITM call options would be the most effective and efficient use of capital. As my capital is limited it is not feasible for me to just go and buy the underlying to hedge my deltas. Not that I would if I had a less capital intensive way to accomplish the same goal.

Anyways onto the hedge. I have modeled my portfolio by adding 9 July '10 98 calls. Which basically gives me 900 long deltas with SPY above 107. This moves my break even on the downside to about 106.76 and 109.68, and I start making money past the 109.68 point and potential is unlimited to the upside. Here is a look:


Now two questions:

1) When do I put the hedge on?

I would add the hedge with the SPY trading at or above 109 which is about .15 above my current break-even at 108.85. I will re-evaluate the amount, but currently I would look to buy 9 deep ITM 98 calls.

2) When do I take it off?

I would take the hedge off on the downside at about SPY 107 which would lock in a loss of about $950 on the hedge but still in the sweet spot of my range of profitability. If it expired around 107 I would still gain to make about $350. Below this my max loss is about $600.

If it were to rally up again then I would look to put it back on at the same spot of about SPY 109.

I will keep you updated. 

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