Trade Idea: SPY Sold Put With Delta Hedging

This trade is something I like to do sometimes to hedge the directional risk of sold puts.

Selling a put is a pretty standard trade, but what I’ve done is add a short stock position of -8 shares which is basically hedging half of the delta of the sold put.

What this does is reduces delta from 16 down to 8 but doesn’t cost us anything in the way of Theta or Vega.

We also get a slightly larger profit potential on the downside.

The drawback with the trade is that if SPY does rally, the profits will be a lot smaller than they would be if I didn’t sell the shares.

The profit zone for the trade is roughly between $237 and $322 so it’s a nice wide profit zone.

The trade is unlikely to see huge returns but should hopefully generate a little bit of a return over the next month.

If SPY does drop, I might sell some more SPY shares to keep delta relatively close to neutral.

Likewise if SPY rallies, I might buy back some of the shares and let the put expire.

Let’s see how this one goes.

After posting this article, I had some interesting questions from a reader:

1. Do you always sell the put at delta 15?
2. How does the position make money?
3. What happens if SPY goes up?

Really great questions and here are my thoughts:

I like the 15 delta puts usually and yes half delta hedge is good depending on my market opinion. If I was more concerned that SPY would head lower, I would fully delta hedge.

I would buy back the 8 shares well before $322. Probably around $300. Also as time passes if SPY hasn’t dropped the delta of the put will slowly decline so I don’t need as many short SPY shares, so I might end up buying back 4 shares even if SPY is flat but time has passed.

So let’s assume SPY goes to $300 in the next week or so. We’ll lose $167 on SPY shares but at that point, it’s very unlikely SPY will head back down and break through $245, so I would buy back the 8 shares and let the put expire worthless.

The put was sold for $355 so the net profit on the trade is $188.

You can use stock to hedge any position. Credit spread, iron condor whatever. Stock is always delta 1.

Trade safe!
Gav.