Shorting the SPY (And Living to Write About It)

06/13/2014 6:00 am EST

Focus: STRATEGIES

Steven Spencer

Partner, SMB Capital

In his 18th year of trading, Steven Spencer of SMB Capital offers a review of a gutsy recent short trade in hopes that other traders might find insights about position management in it.

I initiated a pre-market short in the SPY on Thursday, June 5, at 193.50. I added to the position as it popped to 194 following the ECB announcement of some monetary stimulus. It was the first time I had shorted the SPY in about six weeks. The risk on the trade was about 40 cents from my average entry and was designed to take advantage of a two-to-four-point pullback. Looking back over the past few months, the best short-term shorts in the SPY were following strength such as April 4 or May 13.

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The trade started to work in the pre-market, and when the market opened, the first move was down as well. By 10:00 am, the SPY was trading below pre-market support of 193.30 and there seemed to be a realistic chance that we might see a "trend day" to the down side. Around 10:30 am, the price action became more bullish with the SPY moving about 50 cents off its low. And by 10:45 am, the start of a second up leg signaled that my short position was clearly not working.

At this point, I still had a decent size open profit having covered 25% of the position during the initial down trend and another 25% when the down trend was broken. The question I was facing was should I flatten the position entirely booking a profit or let the uptrend run its course and cover the remainder at my original stop above 194.20? I elected for the latter course of action, booking a small loss.

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Position management can be a tricky thing. I had the opportunity to book a winning trade but chose not to. Why would I do this? Was my decision "correct"? The down trend from the pre-market clearly had ended. We are in one of the greatest bull markets of all time. Both of these factors supported the idea of getting flat the remainder of the position. A counter argument is the trade was still in the money and until it held above the pre-market high, I was not proven wrong. (I re-established a short on Monday at 195.97 and currently am still short).

By Steven Spencer, Co-Founder, SMB Capital

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