We have another home run here, a 13.02% profit in only 6 trading days.
Friday the 13th seems as good a day as any to take a profit. Also, we are realizing 87.17% of the maximum potential profit in the S&P 500 SPDR's (NYSEARCA:SPY) May 2016 $210-$213 in-the-money vertical bear put spread.
In the highly unlikely event that we have a major rally in stocks next week, we now have new dry powder to play with, having cut our net short position from 40% to 20%.
If you have the ProShares Short S&P 500 Short Fund ETF (NYSEARCA:SH) (click here for the prospectus here), or the ProShares Ultra Short S&P 500 Short Fund 2X ETF (NYSEARCA:SDS) (click here for the prospectus here), keep them.
We are going lower.
This trade takes our performance up to a blockbuster 10.37% so far in May, and 11.58% since the beginning of 2016. These are numbers almost anyone would kill for.
I never bought this week's rally in the Dow Average for two seconds. No volume, no news, and no cross asset class confirmations meant it was not to be believed.
It was just another opportunity for the high frequency traders to pick the pockets of hedge funds by squeezing them out of their shorts, which they have been doing on a weekly basis all year.
That conviction allowed me to hang on to my aggressive 40% net short position, until now.
This takes my Trade Alert performance to a new all-time high of over 203.26%.
Better yet, We are poised to make as much as a 14% profit by the end of next week with our remaining positions.
To remind you of why we are short the S&P 500 in a major way, let me refresh your memories.
It's all about the strong dollar. A robust buck diminishes the foreign earnings of the big American multinationals, major components of the S&P 500.
I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012.
Share prices are anything but inspirational here.
Price earnings multiples are at all-time highs at 19X. The calendar is hugely negative. Soggy and heavily financially engineered Q1 earnings reports came and went.
Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side.
Oh, and this is bumping up against granite like two-year resistance at $2014 that will take months to break through in the best case.
Did I mention that US equity mutual funds have been net sellers of stock since 2014?
This position is also a hedge against what I call "The Dreaded Flat Line of Death" scenario. This is where the market doesn't move at all over a prolonged period of time and no one makes any money at all, except us.
If I am right on all of this, May will come in as the most profitable month for the Mad Hedge Fund Trader Trade Alert Service in more than a year. For new subscribers, your timing is perfect!
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of options house.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don't execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Sell 37 May 2016 $213 puts at: $8.40
Buy to cover short 37 May 2016 $210 puts at: $5.45
Net Cost: $2.95
Potential Profit: $2.95 - $2.61 = $0.34
(37 X 100 X $0.34) = $1,258 or 13.02% profit in 6 trading days.
Time for Some Downside Protection
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.