Shorting the SPY

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At the live trading session yesterday, we potentially have a winning explosive trade.

Prior to the market open, we discussed the market trend. I mentioned that my view of the market is that the market is at the tail end of the recent rally. It have to retrace soon. How soon we are not sure.

As the SPY gapped down on the intraday chart (5 mins candle) at the open, I mentioned during the session that the perfect set-up would be: the SPY fill the gap, hit Monday's high (which is the high of the recent rally since March), fill the buy stop orders of the other traders then retrace downwards. We would then want to short the SPY.

We watched. SPY did fill the day's gap but did not manage to break Monday's high. It then started to retrace. The participants shorted when the SPY was around 98.07. They bought the Sep 98 Put. The stop loss is 10cts above Monday's high. The SPY went down further. It happened that the SPY closed near our entry.

Theoretically, it was a good trade as the risk is extremely small but the SPY has the potential to drop by more than $10 in one month.

If the participants stick to the plan, they should not be stopped out yet. What they have lost so far is the time-value which is minimal for September options. However, what they have got if it goes according to plan, is a good entry point especially when the market gapped down and closed lower today, forming a potential confirmation candle (for a retracement - downtrend in this case).

My advice to the participants, once they have a good entry and they are correct about the trend, just ride the trend. When to exit? There are many ways depending on the situation, risk tolerance and trading objectives.

In the meantime, enjoy the ride when it comes to you..... Weeeeeee...........

Cheers !

PersianCat (Millionaire-in-progress)