This has been a very difficult market for anyone with a bearish bias.

I naturally lean bearish. I’m skeptical of the financial markets. And I think the entire game is rigged to take my money.

So, I constantly doubt the integrity of any move higher in the stock market, and I’m always looking for an opportunity to profit on the short side.

Having said that… I’m also quite selective about when I decide to take a short position in the market. Most of the time, the odds are against it, and it’s hard to hold a short position and lose money while the market is moving higher – and, it seems, everyone else is making money. So, I am quite selective when placing short trades.

But, I did tell my Delta Report subscribers to buy put options on the S&P 500 last Friday. I was a few days early on the trade. But with yesterday’s pullback in the market, we were able to close the trade for a profit.

Not everyone was happy about it, though. So, I’d like to share this email with you today…

Jeff, what happened to the Nov 17 $256 puts on SPY? You are giving suggestive recommendations – are you guessing? Also, I have asked you for many weeks, what is your sell discipline? Every trading plan has to have one to have effective money management.

Currently down 50% on above puts, I am going to cover them today because I keep losing money…

Also, please comment on DKS position. Thank you.

–  John G.

Hi John, thank you for your email.

I know you’ve sent several emails over the past few weeks. And I have subtly tried to address your concerns in my blog postings. This time, though, I’m going to be very direct – because I would like you to understand a very basic principle behind every one of my recommendations…

You and I are on the same team. I want you to make money on my advice. I want your experience to be profitable. And, in every recommendation I make, my only motivation is for you to achieve a profit.

At the same time… I’m a realist. While I expect every trade I recommend to be profitable – otherwise I wouldn’t make the recommendation – I know there’s a good percentage of trades that will be losers. That’s just the nature of trading. So, I try to define the risk up front.

For example, on the SPY November 17 $256 puts you referenced, I thought it was quite clear in my recommendation that if you bought the put you would have to be willing to risk 100% of the premium you paid for them. In fact, I think I stated that at least three times in the recommendation.

That was the whole point of buying put options on SPY. Rather than shorting the stock at more than $256 per share and risking an unlimited amount if the market moved higher, we bought put options for $0.75. So the most we were risking was $0.75 per share.

I also stated – quite clearly, I thought – that we might be early on the trade. I recommended buying the puts last Friday when the S&P 500 was bumping into resistance at 2583. I said there was a chance the index might run up to the 2595-2600 level before it turned lower, and that you had to be willing to risk that sort of a move if you bought the put options. But, I also thought we were close enough to a significant, intermediate-term top in the market that the risk/reward setup of buying put options made sense.

The stock market moved higher every day this week – until yesterday. But every day this week I also updated my thoughts on this position.

I continually stated the S&P looked poised to run up to the 2595-2600 level. But I also pointed out that the divergences in the technical indicators and the breakdown in the high-yield bond sector justified maintaining at least some modest exposure on the short side.

That exposure finally paid off on Thursday as the S&P lost support and traded down to the 2570 level – which was my first downside target for our SPY put trade.

I recommended selling the puts in two transactions. The end result was a gain of about 42% on the trade in less than one week.

That’s less than the profit I was hoping to achieve. But we were early on the position, and I was glad to be able to take the gain as the market moved lower yesterday.

If you took a loss on this position, then that’s unfortunate. But it’s also not the result of my advice.

I quite clearly stated that you needed to be willing to hold this position through a move up to 2595-2600 on the S&P 500. I said you had to be willing to risk a 100% loss on this trade. When I recommended the trade I said I was probably early, but I liked the odds of it. And, as the trade went against us early this week, I updated you every day as to the status of the S&P 500 and the multiple divergences that were setting up. I reiterated – multiple times – that I was more comfortable holding a small loss on a small short S&P position than in not having any short exposure at all.

And… when the market started to fall on Thursday… I told you to take the profits as the conditions quickly shifted from overbought to oversold.

Frankly, John, I think I’ve been quite clear about my purchase and sell disciplines on this trade, and on every other position I’ve recommended.

Most of the time, my sell targets are listed in the original recommendation. I tell you where I think we’ll take profits on the trade, and where we need to cut our losses if I’m wrong.

I’m not perfect, of course. Some of the trades I recommend are not going to work out well. And, in the event that one trade gets away from me – as is the case with our current holding of TEVA Pharmaceuticals – I’ll try to keep you updated on my thoughts and on my plan for working the trade back to profitability, or on just taking the loss and moving on.

My main point here, though, is that we are on the same team. I want you to profit on my advice. And I will try – constantly – to keep you updated on our trades and to let you know if my thoughts on any position have changed.

That said… there’s no reason for you to have taken a loss on the SPY put trade I recommended. This was a profitable trade for us. And, had you adhered to the advice I provided, you should have been profitable on this trade as well.

As for the DKS position… we’re still in it. We’ll be profitable on the trade as long as the stock holds above $24.40 by the time the options expire in December.

Best regards and good trading,

Jeff Clark

Reader Mailbag

For today’s mailbag, we hear about another reader’s experience with the recent bearish SPY put trade…

I was a few days behind you getting in to the SPY put trade so the price was a little lower than on the day of the recommendation and I got in at $0.45. My usual threshold on bearish trades these days is between $250 and $500 so I bought seven contracts of the 256 put and then watched as the value kept declining as the pullback didn’t come. So by Tuesday I had decided that with expiration next week, I would give them until this Friday to “show their stuff.” When I saw the decline in futures starting last night, I knew I had a good chance to get out at a profit today.

And so it happened. I sold the seven contracts within the first hour of trading for $0.67, representing almost a 50% gain against the cost basis. I did contemplate holding on to see if there would be further downward movement but with the reversal at 9:50 a.m. towards the upside, I figured this was going to be another one of those short dips.

This trade reinforced two ideas: One, the entry price is critical. It was only circumstance that led me to get in to this trade later and lower. Had I entered at the original recommendation, I would have only been at breakeven at the low point today. And second, a put does not have to go in the money to be profitable. In this case, the price bottomed about $257.50 – still $1.50 above the strike.

Thank you, as always, for your commentary and the education you provide. Since it was only seven contracts, the gain today was only about $150, but every little bit helps!

–  Paul W.

If you have any trading experiences you'd like to share, a question about option trading, or even a suggestion for the Market Minute or Delta Report, let us know right here.