Hedging short book by selling puts

Something like 17 of the last 19 Mondays have been up days in the market, with 80% of the market’s rally from March 2009 lows being accounted for by Monday moves. Though the rally’s reversal may unwind some correlations, including the “Monday effect”, Friday’s market action near close combined with this Monday correlation is making me hedge my short position by selling puts in SPY, XLF, and X.

The Financials SPDR (XLF) is at support around $13.50, so it may have a technical bounce here. SPY isn’t at any significant support level, but it is oversold after the sell-off in the last two weeks, so it could find some buyers here, too.

XLF

This week could still offer more downside, especially if correlations are unwinding with this reversal. But the probability of a bounce here is more likely than in the last two weeks and taking some gains/hedging positions is prudent. Because of a lot of upside resistance from broken support levels in the last two weeks, the market could be headed for some choppy action this week if it doesn’t continue its selloff.

SPY

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