Time to Hedge SPY Longs w/ Puts? Testing Resistance, Well Above 50 Day Moving Average.

If I was long $SPY in size I'd probably hedge with some May-June puts for insurance. Lower volatility has pulled down premium, however lower vol could limit option (insurance) profitability if SPY corrects just a few points. Someone with dough could even sell out of the money covered calls to lower their cost basis/increase yield. Here are the May and Jun SPY option chains. Puts require less capital to risk but price points and volatility are key for profitability (you'll rip up the contract or sell at a loss if the market spikes or declines less than premium before May/June). Going short or buying inverse ETFs could also hedge a technical breakdown but you're deploying more capital against long positions. All of this is my opinion. Here are sites I go to for options and volatility research Schaeffersresearch, Optionmonster, Investing With Options, VixAndMore, Daily Options Report.

$SPY increased 30% from $66.62 to $86.54 in a little over a month so it could take a rest eventually. Today retail sales numbers took the S&P down 2%. Total sales declined -1.8% vs. consensus +.03%. Here is Briefing's take.

"The fairly broad declines in sales for retail businesses in March has created some concern that the improvement in January and February might have been owed more to a temporary bounce than anything else following some bleak sales reports in the fourth quarter. This isn't good economic news and it certainly fits more with the weak employment data than the surprisingly good reports seen in January and February. It is a setback that is apt to cause a number of investors to second guess the big run seen in the retail stocks." (Source: Briefing.com)

Even with decent news from Goldman Sachs and Wells Fargo , I'm wondering if poor earnings or an ugly GM bankruptcy could throw the market a curve ball. Also if the S&P wants to hit 1100 by year end (Leuthold Group's call), a minor fib retracement would provide a stronger foundation IMO.

The $SPY is testing its long term downtrend as well as 87 ceiling resistance. A break above those levels with volume would give victory to the bulls and the economic recovery. If it fails, the 50 day moving average and $80-ish look like decent support levels. SPY hasn't officially broken down yet so watch for the TIPI break!.

$SPY 6 Month Chart (Source: Stockcharts.com)


$SPY 1 Year Chart (Source: Stockcharts.com)

At Monday's close the Put/Call Open Interest Ratio stood at 1.53. It's interesting that puts to calls open spiked along with the market. So there's either big time hedging going on or tremendous skepticism of the recent rally.

$SPY Put/Call Open Interest Ratio (Source: Schaeffersresearch.com)

It's not surprising that the Put/Call Volume Ratio tanked during the rally. It looks like it could be forming a base again.

$SPY Put/Call Volume Ratio (Source: Schaeffersresearch.com)

Also look at the $VIX (the fear gauge). It's been in a steady downtrend since the Lehman bankruptcy. Are the skies friendly again?

$VIX Chart (Stockcharts.com)