Friday, May 14, 2010

Blast Off...

After three valiant attempts to break above the 50 day moving average on the S&P 500 Index, the balance of control seems to have shifted back to the bears for the time being. With today's downdraft, I was able to initiate the first adjustment on the SPY risk rocket by covering the short 100 shares around $113.50. Given that we initially shorted shares at $116.50 and purchased two Jun 111 puts for $1.95 apiece, this 1 ATR gain of $3.00 drops the total cost basis of the puts from $3.90 to $.90. At this point, I could opt to simply hang on to the puts and take comfort in the fact that I've dropped the risk to a mere $90. Or, I could initiate one of the secondary adjustments outlined within the decision tree in my previous Risk Rocket post.

After playing around with various adjustment, I chose to roll into an OTM put butterfly. In addition to the long two Jun 111 puts, I shorted four Jun 106 puts and purchased three Jun 101 puts. The one variation I added was the extra 101 put. This opens up the downside of the risk graph to allow better participation if the market falls apart again (click image to enlarge).

[Source: MachTrader]

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