Last Thursday, November 5, I discussed the morbidly overbought readings of the benchmark S&P 500 index and laid out a trade to buy put options for a mean-reversion trade lower.
Specifically I said that I was buying January 2016, $211 strike put options on the popular and very liquid S&P 500 ETF (SPY:arcx) for $6 or less. Since then the S&P 500 has fallen about 2.7%, and the put options have risen to more than $9. I took some profits late Thursday from this trade and will take the rest of the gains today, Friday, when US markets open for trading. That’s more than a 50% gain in one week.
As a result of the drop in the S&P 500 over the past week, the index is now somewhat less overbought technically. Some further downside may be possible, but from a risk-management perspective I am happy to take profits from my puts for now.
The daily chart shows that the weakness in the index has now pushed it back below its 8-day and 21-day moving averages, but into the blue support zone spanning from about 2,020 up to 2,045 points. I will look to buy the index again upon the next bullish reversal, but for now I am happy to be flat, with no position.
