Options Trade #7 - SPY Bull Put Spread

Updated: Dec 6, 2018

VTS Community

We're going to open a new Bull Put Spread on SPY today, very similar to the one we had opened previously and I think it brings up an interesting topic that I want to expand on a little bit.

Dollar Cost Averaging  vs  Averaging down  vs  Reloading

Dollar Cost Averaging:  This involves buying a fixed amount of an investment on a regular schedule regardless of the share price.  It can be a useful long-term investing technique for people who want to own an investment but don't want to make any predictions at all about price action or market timing.  An example would be just buying X$ of Apple every 6 months regardless of the share price.  This way you can participate in the long-term growth of the company without having to predict short term fluctuations. 

Averaging down:  This is the more sinister spin off of dollar cost averaging that involves adding more to an investment because the original investment is down in value.  I say more sinister because this practice of "averaging down" can be extremely costly in the long-run. 

There are usually a large number of factors we need to consider before actually allocating money to a particular investment.  However many people fall into the trap of reducing those factors to just one:  Price.  If you're down money, buy more.  If you're down more money, buy more again.  As the "theory" goes you keep reducing your cost basis and eventually you recover your money. 

The obvious question we should ask is:  And if the price never recovers?  Maybe I'll expand on this terrible investor habit of averaging down in a future video, but for now we'll just say it's a potential recipe for disaster and nearly every long-term investor has at some point gotten themselves into trouble by reducing factors to just price and blindly "averaging down."  It quite often can dramatically amplify losses.

Reloading:  This is not an official term that's very common but it's what I call it when we take a trade that is very similar to a previous trade.  It's done with completely fresh eyes on the new trade only, not taking the previous trade into consideration what so ever.  So regardless of whether the previous trade made money or lost money, we ignore it completely and just happen to be getting into a very similar trade again.

Another thing that separates reloading from averaging down is that we will be taking into account all the same variables and market metrics as we would any other trade.  We are not reducing the trade decision to just price, we account for everything just as any other trade.  All previous trades mine as well not have existed.

So this past week we closed out our bull put spread for a loss, and the previous week we closed out our first bull put spread for a nice gain.  The original trade thesis for both of them was that since the S&P 500 has been bouncing off it's 200-day moving average this year and struggling to gain any footing, the bull put spread is a great trade for that situation.  If the S&P breaks to the upside we close the trade out for profit.  If it breaks below we consider that our stop-loss and exit the trade.

So here we are again just bouncing off the 200-day and ready for our 3rd bull put spread.

It's a perfect set up.  So regardless of what we had on for the last few trades, and regardless of whether they made or lost money, we are reloading and putting on another bull put spread.

VTS Discretionary Strategy 25,000$ model portfolio:

SELL to OPEN 5 x SPY 15 June 18' 260 PUT BUY to OPEN 5 x SPY 15 June 18' 255 PUT Credit:  1.23$   

(premium may change throughout the day so always just get the best price possible in the moment.  Higher the better for credit spreads)

And for those interested, just a brief update on the US jobs report today, it was a little below expectations with 164,000 new jobs added in April.  On the upside though the record setting streak of jobs growth continues.

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