S&P 500 Option Shorts

As mentioned in earlier posts, I initiated a short position on S&P 500 index last week, by buying long dated put options.

I initiated a short position by buying put options at strike price of 206, expiring in Jan 2017. The premiums paid, including brokerage fees, was about $9.066.

To put it very simply, this means that I’m expecting the S&P 500 to drop to below 197 by Jan 2017. Of course, it doesn’t have to drop below 197 for me to profit, as long as it starts moving downwards, or if sentiment is sufficiently bearish, I’d profit before then.

I chose long dated options because I am unsure of how long it’d take for my bearish thesis to play out. I am sure I’m going to be right, but then again, a broken clock is right twice a day.

As they say, the markets can remain irrational longer than one can stay solvent.

My plan is to buy 3 lots of put options, everyday that the markets went up, starting from when I first initiated my short position last week.

76) SPY short chart.jpg

This is how the price chart looks like today.

Unfortunately, I got the timing right. Yes, unfortunately. This is because I never got to build a sizable short position. In fact, currently I have only 3 lots of short options. Just barely a few days after initiating my short position, during which I did not add any shorts, the markets started tanking.

SPY short

A $1,100 profit in a week may seem great, but it is really scant comfort to me. I feel like a big fat opportunity just flew past me. As mentioned in many earlier posts, I have been thinking of building a short position, but am wary of doing it too early.

The issue with shorting is, one must not only be right, but must get the timing right as well.

I was prepared to build a short position to the tune of $200k. Instead, I am barely 5% through before the downtrend begun. ouch ouch ouch ouch ouch. This is rather frustrating.

My thesis for building a short position is in a small part, macro global (Brexit & the black swan event of an unexpected Fed rate rise), but largely technical in nature.

I noticed the S&P has been trending upwards with declining volume.

The volume has been ranging between 50mil to 80mil the past week as S&P continued to test the record highs. This is highly bearish IMO.

What Next?

I am now faced with a dilemma. Take my profits today (S&P 500 is falling hard as I type this and the net gain is now $1.6k), or hold my puny short position.

On the 1 hand, the price has fallen below the 50 day MA. That’s bearish for sure.

On the other hand, global macro news like no Brexit afterall, can seriously derail my short position. I do have the luxury of time though as the options expire in Jan 2017.

Normally, when faced with such a dilemma when I have no visibility on the odds of both sides, I’d cut my position gradually, taking some profits off the table. In this instance though, having only 3 lots, it’s just outright pointless.

Updates

On a different note, I’ve received several emails, some have been helpful, some have been thoughtful, and all have been friendly. Thank you.

However, please do not ask me to assess your portfolio. My portfolio is a deep value, contrarian one. I am likely to have little to zero knowledge of some random company that I have not assessed before, or am in an industry I am unfamiliar with. In fact, you would likely be able to teach me a thing or two about that specific company instead.

The one caveat is that there are certain industries that I think I’d be familiar with. Mainly construction companies (as you can see I had quite a bit of experience with those), and the local healthcare industry (being my full time occupation). I’ve also some experience in manufacturing companies due to past investments.

Sometimes I think, the emotions one experiences in investing, is the real reward. The anguish, the elation, the feeling of having missed something big (that’s me right now), the feeling of catching something big at the exact right timing etc. They all add color to our days.

Have fun investing.

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