SPY Puts Are an Easy Way to Protect Your Portfolio

A very easy way to play a falling market is to buy forward puts betting the market falls two months out in the future. This is fairly easy and a reasonably cheap way to protect a portion of your portfolio in case the market keeps falling. The S&P 500 SPDR ETF (SPY) allows investors to buy puts that will rise in value if the SPY price falls in price in two months. Given all the forecasted bad economic news likely to hit between now and June 30, when these puts exercise period ends, the price may not be too expensive. This article will explain how simple it is to accomplish buy SPY puts if you believe SPY stock will fall.

You can see the prices for the Jun 17 SPY puts by going to the Barchart option chain for SPY for June 30. Remember to click on the dialog box that allows "50 strikes +/-" so that you can see the prices for the $400 strike price on June 30. The $400 strike price assumes that the price of SPY will fall about 5% from its price today of $422.97.

As of mid-day, Monday, April 25, the $400 strike price puts are trading between $10.96 and $11.01. Just to make sure that you are in the right section, the background to this price should be white, not green. White signals that the particular strike you are looking at is “out-of-the-money.” If your background is green, you are probably looking at call prices for $400, not put prices. Scroll down further to look at the put prices.

SPY Stock Will Fall — But by How Much?

That is the profit motive you have for buying these puts. You expect that the price of the stock market, as seen by the SPY puts, will decline more than 5% below today on or before June 30. That does not seem too unreasonable. After all, even Schwab’s economist is predicting that inflation will cast a deep shadow over the U.S. economy. He argues that a smaller spread between the S&P 500’s forward earnings yield and the 10-year U.S. Treasury yield indicates that stocks look less attractive relative to bonds.

How much below $400 does SPY have to fall before you make a profit buying these puts? Well, let’s see. The asking price is $11.01 mid-day April 25. It will have a different price when you actually buy the puts. But just for reference, that means that just to break even the SPY price has to fall $11.01 below $400. That means its breakeven price is $388.91. This is 8.03% below today’s price of $422.97. So if you buy these puts you must believe the market will fall more than 8.03% by June 30 or earlier in order to break even and start making a profit.

Another way to look at it is this: assuming the SPY price falls 5% to $400 or lower, you could make money if it falls over 8% from today.

Lastly, how much does one June 30 $400 put contract actually cost? Since each contract is worth 100 SPY ETF shares, and since the price is $11.01, the total cost, before commissions, is $1,101 (i.e., 100 x $11.01). Your actual price will be different at the time of purchase. So if you wanted to spend 1% of your $200K portfolio to buy insurance like this, you would buy two contracts or $2,202 for two contracts. Keep in mind this is illustrative only and not financial or tax advice for anyone.