Sold More TLT September Naked Calls

I’m already short 10 TLT September $124 calls that are in the money, but when I saw TLT trade into the upper $128s, I figured the timing was right to add to my short position.  I’m not aggressive enough to add to the same strike, but figured more naked calls out of the money could be a smart move.

While TLT was trading at $127.73, I sold 10 TLT September $132 naked calls for $1.15 each and received $1,145.73 after paying $4.27 in commission.  I could’ve made more if I reacted quicker this morning, but was happy to get my trade in just before 10:00 while TLT was still much higher than it ended the day.  When I first placed my order, I tried for the $133 strike, but TLT was already sliding from its highs and I had to drop my strike by a dollar to get the fat premium I wanted.

My logic is that I might be assigned the TLT September $124 calls and it’ll be nice to have an extra realized gain $1,145.73 to cut into my paper losses while I remain short the first lot.  If TLT surprises me and runs above $133 and I have to take an assignment on another 1,000 shares, my average cost per share will be much higher and will make it even easier to work the trade for a profit.  If I’m assigned the first lot of 1,000 shares at $124 and the $132 calls expire worthless, I’ll plan to sell covered puts out of the money and will sell more naked calls out of the money again.

With my first lot of naked calls $2.34 in the money as of the close of trading, I wouldn’t be surprised if I was forced into an early assignment at the end of the month, just before TLT goes ex-dividend.  There’s a lot of time between now and then, so TLT could be $5 or more in either direction before that becomes an opportunity for the call owner.  TLT swung in a $3.10 range today and could do the same for a while.

What I liked seeing was that while the S&P 500 fell 77 points and the Dow dropped 583, TLT finished a tad bit lower instead of holding onto its gains.  That’s bullish signal for stocks and a bearish signal for bonds in my opinion.  These next few days will surely be wild as everything starts to settle down before long.

Rolled SPY and FEZ Naked Puts

I just noticed that I haven’t made a trade in this account in nearly a month, since the June option expiration Friday.  I didn’t believe it when I saw it and actually ran another activity download into Quicken to make sure I didn’t miss a trade.  I knew I didn’t have much I wanted to update coming into the month, especially with prices down, but was still surprised by the realization.  Anyway, I remedied that lack of activity today with two trades.

I started with SPY from an order I placed yesterday.  I thought stocks could rise a little more by Friday and priced my limit order to hit on further strength.  I missed the peak when my order hit within the first two minutes of trading.  While SPY was trading at $211.75, I bought to close my one SPY July $215 put for $3.25 and sold to open one SPY September $215 put for $6.15.  The calendar spread sold for $2.90 and I received $287.81 after paying $2.19 in commission.  Late in the afternoon, it looks like I could’ve earned an extra $15 on the trade.  It’s not much, but it all adds up.

This SPY put was part of a bigger trade I made on April 23, nearly three months ago.  SPY was trading at $211.60 at the time, $0.15 below than when my order hit today and I sold the July put for $699.27 after commission.  Closing it today gave me a realized profit of $373.18.  The other two parts of the SPY trade I made at the time were buying a long SPY March $215 put and selling short a March $195 put.  I’m down on paper by about $62 on the March 2016 combo so far and expect to lose more on it as I make up for it with today’s trade and other bullish trades.  I sold the March spread for $712.20 and cut into that with today’s realized gain by $373.18, leaving me with $2,000 of insurance for a cost of $339.02.  If my September put turns into a full profit, I’ll be ahead of the game and will have six months to trade against SPY with a $20 cushion on each share.  I had no fear about selling the September put in the money since I knew I had it hedged for a ~10% correction.

SPY Naked Put Risk/Reward Breakdown

  • Potential profit: $613.90
  • Potential return: 2.94%, 16.26% annualized
  • Breakeven price: $208.86
  • Downside protection: 1.36%
  • Recent high: $213.78 on 5/20/15
  • Cushion from recent high: 2.30%
  • Expected support:  I’d like to see today’s low of $211.58 hold support since SPY gapped up to it, but won’t be surprised if July 13 low of $208.94 gets retested.  July 13 is when SPY gapped higher by nearly a dollar just a few days ago.  The intraday low on July 7 at $204.12 is the big line I’m going to watch.  Not only was it support last week when the market reversed course, but it is also almost 4% below today’s intraday high, which is within the normal range for the current bull market cycle’s mini-corrections.
  • Position close goal/limit:  As I covered in my writing above, this put is hedged with a March 2016 calendar spread.  That hedge gives me room to avoid worrying about a true correction of 10% on SPY.  I could see major buying coming back in when we finally get the 10% monkey off our backs.  Then again, I don’t know what’s going to cause a 10% correction, so my opinion could change if we get an unexpected macro-event.

My FEZ trade didn’t have a hedge mixed into it, so it was simply a calendar spread with no other backing.  I sold the new put in the money too, mainly because it is only on two puts and FEZ could outperform for another couple of weeks if events in Greece calm down with their latest Band-Aid.  While FEZ was trading at $39.12, I bought to close my two FEZ July $40 puts for $0.97 each and sold to open two FEZ November $40 puts for $2.37 each.  I received $276.83 after paying $3.17 in commission for the $1.40 calendar spread.  I would like to have had a shorter time before expiration, but the September puts aren’t available yet.  I have nearly $50,000 scheduled for September expiration already anyway between my MDY and SPY puts, so it might be good that I spread it out further down the calendar.

FEZ was trading at $40.38 when I sold the July naked puts, $1.26 higher than it was when I made my trade today.  The cool part, like with my SPY put above, is I made money even though the underlying ETF lost money.  I only had a realized gain of $112.83 on these FEZ July puts, but that’s a lot better than losing $252 plus commission if I had bought the shares outright.  This has been a fantastic year to sell options and I’m going to continue to use the same strategy until it stops working.

FEZ Naked Put Risk/Reward Breakdown

  • Potential profit: $474.41
  • Potential return: 6.28%, 17.83% annualized
  • Breakeven price: $37.64
  • Downside protection: 3.79%
  • Recent high: $40.81 on 5/21/15
  • Cushion from recent high: 7.77%
  • Expected support: Today’s low was $39.03 and was right at the 50-day moving average as it gapped higher on the positive (not positive for Greeks) news.  This low could be an area of potential support, but a retest down to the highs from earlier in the week, around $38.87 is likely too.  The key support I’ll be watching closely is at $38.30, the low on July 10 when FEZ gapped higher by more than a dollar.  The 20-day moving average is below that mark now, but has turned higher and could help provide support along with the 200-day moving average that is just above this area.
  • Position close goal/limit:  I’m using the same philosophy as I did when I sold the July puts I just closed out.  I only sold two puts so I could take the assignment on weakness.  I still don’t think Europe is about to fall off a cliff and want to hold onto the position on a dip that goes below my strike.  FEZ had an intraday low of $35.13 last week and I admit to being a little nervous, but I didn’t panic and it worked out for me.

SPY – 6 Month Chart

The chart below shows the daily prices for the past six months on SPY, an S&P 500 Index ETF, after closing the week at $207.31 on July 2, 2015.

SPY has traded in a fairly narrow ascending trading channel for the past five months.  The range of the channel narrowed even more over the last three months, until last week when the large-cap ETF dropped to the bottom of the longer channel.  Once again, the longer trend line of higher lows offered support for the index and stocks began to climb again.

The trend line of higher lows that started in February wasn’t the only indicator that came into play this week.  The 200-day moving average coincided with the trend line to provide a second reason for the selling to stop.  The 200-day moving average has been a solid line of support during the current bull market.  SPY has only taken one trip below it since November 2012 and traders will be watching this line carefully to see if it can hold through the latest headlines again.  Traders should keep an eye out for a close below the 200-day moving average and treat it as a bearish indicator.

Bears expect the three-month trend line of higher lows that was support to become resistance now that SPY has traded through it.  Bolstering their case, SPY could not move above this line in either of the past two sessions.  It is highly unlikely that this extremely narrow trading range from the past few days will last much longer.  Debt issues in Greece and Puerto Rico or the upcoming corporate earnings announcements will push stocks sharply in one direction in the near-term.

The Williams %R indicator will give an early prediction on the new sentiment shift.  Just as it did in March, Williams %R signaled the mini-correction in the second half of June too.  For the first time in five months, all three time indicators fell into the oversold area in this past week’s slump.  While getting there is bearish, coming out of this gray area is bullish.  Traders need to be careful not to assume that one or two days above the gray area is enough.  The move needs two or three confirmation days to validate the shift in sentiment and those days should not include a down day, as we saw on Friday.

Monday will be an important day of trading to see how the markets react to Greece’s vote on Sunday.  Based on the media hype from most of last week, it shouldn’t take more than a day or two to decipher where stocks are headed.  The opening reaction in the first 30 minutes of trading will not necessarily dictate the direction that will follow in the coming weeks.  Traders will need to be cautious with their moves.

A rally from the lows might not have much room to run beyond the highs from May.  Resistance should come into play around $215, near the top of the upper trend line of higher highs, only $8 above Thursday’s close.  A bearish move has approximately the same room to fall.  If the 200-day moving average and the longer trend line of higher lows breaks support, SPY could drop quickly to where support caught SPY throughout the winter months, around $198, only $9 below Thursday’s close.  A decline of this magnitude would only give SPY a 7% retracement, still not a technical “correction” of 10%.  Longer-term investors should ignore much of the noise surrounding Greece and concentrate on the value of their stocks as corporations release their latest earnings.