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Something significant just happened that hasn’t occurred since May — SPY, the S&P 500 (SPY), has broken below its 200-day moving average (MA).
This is exactly what I warned about last week when I said we were in danger of this breakdown. The timing feels suspicious, with major headlines dropping on the exact day SPY tagged the 200 MA.
It almost feels coordinated when news hits perfectly at a critical technical level. Right now I’m looking at potential downside targets of $605 or even $600 on SPY, which could erase the entire summer session. Weakness is also spilling into credit markets, with private credit selling off — a sign of broader pressure building under the surface.
When a technical level this important gets violated while credit markets wobble, it’s time to think seriously about protection. The question isn’t whether you should hedge — it’s how to structure that hedge.
Put Spreads: The Cost-Efficient Protection Strategy
For most traders, I’m leaning toward put spreads rather than straight long puts. You can start with $20-wide spreads and adjust based on your risk tolerance and capital allocation. Want tighter control? Go $10-wide, $5-wide, or even $1-wide.
Put spreads give meaningful downside protection without the crushing time decay sensitivity hurting long put buyers right now. Long puts are expensive and more sensitive to time, which isn’t ideal when you’re trying to hedge efficiently.
Another approach is taking out-of-the-money (OTM) put spreads. Going further OTM keeps the cost down while still giving a structured hedge. It’s a simple way to add crash protection without burning cash.
Long Puts: The Outsized Risk-Reward Play
There’s one scenario where I’d consider long puts: far OTM for June expiration. We’re talking strikes that seem ridiculously low — $1-wide positions where you’re paying very little premium.
This creates an outsized risk-reward setup. You’re paying a small amount for insurance, and if it works out, you make a lot. Think of it like actual insurance — a small acceptable cost for catastrophic protection.
Here’s what to avoid: Paying a lot for insurance and only getting a little back. That would be a bad insurance policy. The timing of this breakdown feels almost too perfect, but that’s the market.
By the time you’re saying you need puts, that’s the max pain trade. But when SPY breaks a level it hasn’t touched since May while credit markets weaken and headlines land at the exact moment of technical failure, you have to respect what the chart is telling you.
Whether you choose spreads for cost efficiency or distant long puts for maximum upside, the key is having protection in place. This technical breakdown is real and deserves your attention.
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To better trading,
Alex Reid
WealthPin
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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