Time To Consider Puts On SPDR S&P 500 Index

| About: SPDR S&P (SPY)

When it comes to protecting positions in a portfolio, risk management is something that all investors should take into consideration. Even if investors are sitting on the sidelines and not playing the market most people still practice risk management everyday. People provide risk management for themselves when they buy auto insurance on their vehicle, even though you may never get in an accident. Purchasing Life insurance can also be seen as another form of risk management. Even though buying insurance is option able, you're thankful when you need it the most. Sometimes it can be a difficult decision to decide when to purchase portfolio protection, since investors don't want to consistently chase losing bets as the markets creep higher. When purchasing protection this should be a trade investors feel comfortable with making and portfolio protection should be viewed as an important tool to leverage investments.

One way to protect a portfolio is to buy puts on the SPDR S&P 500 ETF (NYSEARCA:SPY). The S&P 500 ETF is a weighted index that consists of 500 large cap stocks that are traded in the United States. The SPDR S&P 500 ETF index is up a little over 10% year to date with a starting price of 127.49 on January 3, 2012 and closing on March 15, 2012 a gain of $13.19 per 100 shares of the SPDR S&P 500 ETF.

Chart forSPDR S&P 500

I'm bullish on the markets in the short term and I am looking forward to the upcoming earnings season. But, from time to time as the markets creep higher, protecting your portfolio can also become cheaper. One's trading style will dictate how much protection (if you want to protect yourself). I generally aim when wanting to take protection to set aside 10% of cash for protection. So if I had a $5000 portfolio then one idea is to set aside $500 for protective purposes if positions are mostly bullish. I am comfortable with setting aside 10% since at times(depending on how much I am trading) I tend to have a bullish diversified portfolio. I have a percentage set aside for my favorite blue chip stocks, a percentage for a particular sector, a percentage for speculative trading and so on.

Investors may have different reasons for wanting to put a bearish position in the SPDR S&P 500 ETF, but I am comfortable with having money set aside for short term protection. There are still some short term catalysts for the SPDR S&P 500 ETF to slowly head higher, but I believe there will be some dips along the way are here are two ways to protect your portfolio using puts on the SPDR S&P 500 ETF.

Trade #1 Buy May $138 put for $289

Cost: 2.89 x 100 = 289

Break even:= ($138 - $2.89 = 135.11)

Days till expiration: = 65

In this trade one aims for the S&P 500 to pull back to around the 1350 level. Even if you don't get to 1350 level you should profit if there is a crummy day in the markets.

Trade #2 Buy May 138/135 vertical put spread

Cost: 138 = 2.89 135 = 2.08 (2.38 - 2.09= 0.81) 0.81 x 100 = $81 per spread

Break even: Put you are buying - cost per spread (138 - 0.81 = 137.19)

Days till expiration: 65

This is a risk defined trade where you can only lose $81 dollars instead of $289. On this spread you can achieve a maximum profit of $219 or over a 2:1 payout. I like using a vertical put in a situation where the market is trending higher, but I believe a slowdown could be coming. On the technical side the SPDR S&P 500 ETF is trending on the high side of the Relative Strength and Full Stochastic indicators, but these can trend on the high side for a period of time. In these types of trades you have to be quick to ensure you can get the lowest price possible and I generally aim for a small profit when the trade works out. I would not want to just jump into this trade right away, but instead wait for the right time to strike as the markets head higher. When wanting to take a protective position it's a good idea to pay close attention to the technical indicators and how individual sectors are performing. I am not looking to jump on the bear wagon yet, but I am sticking to my thesis of protecting my positions with some cheap insurance. Thank you for reading and Good Luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.