Trading Basket Of Stocks

Hey 5-Star Trader, 

“Tuesday Trade” Journal: One of the most important concepts in trading is to review your work, and learn from the good and the bad. Identifying what is working is critical — to do more of it. So, to lead by example, each Tuesday, you’ll get a trade from my trading journal, in which I explain my thought process from start to finish. Trading is all about finding something that works and applying it over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For “Tuesday Trade”  this week, I want to outline my trade in the S&P 500 (SPY).

Trading indexes can be a lucrative move because it allows you to rely on a basket of stocks, rather than a single ticker. This can be especially helpful when trying to avoid volatile moves an individual ticker might have. 

Earlier in October, we saw a lot of market chop. Despite JPMorgan Chase JPM having a fantastic earnings report, they were trading 2.66% lower. Delta Airlines had also reported positively but was also experiencing momentum to the downside. Taking this as a bad sign for what was to come, I decided to try and hedge the SPY.

I don't normally hedge, but with indexes below resistance and earnings ahead, I thought if there was a time to do it, this would be it, so I went in ㅡ BUY +3 BUTTERFLY SPY 100 (Weeklys) 22 OCT 21 435/425/415 PUT @1.47 limit order (LMT).

The idea behind this trade was to see if the SPY would retest previous lows in the next nine days. If it didn’t, it would probably expire worthless. For that reason, I kept my risk low at 1.5%.

Below is a screenshot of the target for the hedge in the SPY. As you can see we were below resistance, with red candles, a squeeze, negative volume, and the 127.2% extension is very close to the key psychological value of 425.

The very next day the market seemed to find its footing toward the upside, but that upside was followed by a run directly into resistance. I was waiting to see if we got a push through this overhead area of resistance along with some follow-through to break us out of the pinball mode we were stuck in. If that could be done, I would have a better idea as to what direction market sentiment was heading toward.

Several days later it was clear that the market wanted to keep pushing toward the upside. While that was great to see, for this particular trade I was banking on the SPY turning toward the downside so I did have to take a loss ㅡ SELL -3 BUTTERFLY SPY 100 (Weeklys) 22 OCT 21 435/425/415 PUT @.20 LMT. 

I had placed a hedge because I thought there was a possibility that the SPY would retest the lows, but in the end, the market decided to go another direction.

When placing hedges (and any other trade) it is important to adjust your risk accordingly. For now, let’s enjoy the bullish sentiment and start looking for new opportunities in the market!

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