Closed SPY Hedge for March 2016

I entered a limit order this morning to sell my hedges on SPY and IWM if we saw another price drop over the next two weeks.  The S&P 500 was up by more than 20 points at the time and I thought we would have a solid finish to the day.  I didn’t intend for it to hit so soon, but my SPY order did as the S&P 500 fell back below the previous day’s close briefly.  Before writing this update, I went back in and raised my IWM limit order by a dollar in the hopes of raising my profit on further weakness.  If stocks push higher without dipping further, I’ll have plenty of upside to gain from the 300 shares of IWM I’m long already.

While SPY was trading at $195.41, I sold to close one SPY March 2016 $215 put that I had as a hedge for $24.40 and received $2,439.23 after paying $0.77 in commission.  I sold the put in April and received $1,541.10 at the time.  Today’s sale gave me a realized gain of $898.13, but leaves me with a SPY March 2016 $195 naked put.  The remaining March naked put has a bid/ask of $12.86/13.02, so I could probably get out of it for $12.95 or so and take a ~$435 loss, but all of the $12.95 is time value and we have a long time to go before it expires.  SPY could fall another 6.6% and I wouldn’t lose any more money at expiration.  If SPY stays flat or gains ground, I could pocket another $1,295 over its current value.

I expect the market to be higher by March, if not by the end of this year and thought it was wise to take my profit while I had it on this contract.  Friday will be interesting to see how the market reacts to the jobs data.  It could move in either direction on good or bad news.  I’d like to see strong data, even if it pushes stocks lower briefly.  Strong jobs data means we aren’t hitting a recession in the near-term and stocks should eventually move higher.

Sold OTM DIS Naked Puts

Yesterday, I mentioned that I was planning to sell a new naked put on Disney (DIS) if the share price came down some more.  When I saw the futures were down so much this morning, I raised my asking price from $1.90 to $3.50, just in case there was another stupid open that sent the shares down beyond reason again.  That was too much to ask for and the bid/ask opened around $2.50/3.00 I think.  I lowered my limit order to $2.90, but it took over a minute to get through the system.  By then, the bid/ask was down to $2.25/2.75.  I chased it and lowered my order to $2.60, then $2.40 and then one more time.  While DIS was trading at $100.59, I sold one DIS October $95 naked put for $2.30 and received $299.57 after paying $0.43 in commission.

I don’t think the slowdown in ESPN’s subscribers is enough to bring DIS down 20% and keep it this low for very long.  It could get pushed lower as the indexes go through their current shake out, but below $100 and certainly below $95 seems like a great buying opportunity to me.

My average cost per share is $109.97 from my August option assignment.  If this October put is assigned, my average cost on the 200 shares will drop to $100.64.  As I said above, I view the $100 area as a great entry point and I’m not concerned with a few weeks (or even months) of weakness.  I’d love to see growth in ESPN subscribers during the fall with football season, but I recognize that this trend of viewers leaving cable companies might not be near the end yet.  If nothing else, I’m loading up for a long-term hold, something I rarely do in this account.

DIS Naked Put Risk/Reward Breakdown

  • Potential profit: $229.57
  • Potential return: 2.84%, 18.66% annualized
  • Breakeven price: $92.70
  • Downside protection: 7.84%
  • Recent high: $122.07 on 8/4/15
  • Cushion from recent high: 24.06%
  • Expected support: $95.79 was the low on Tuesday after the obscene low of $90.13 on Monday.  I expect the $95-96 range to hold support.  Worse case, I could see another short visit near $90.00.  The two other days that bookmark that crazy Monday and Tuesday also saw intraday lows in the $96 range, which helps firm up that range for better support on a normal day, but we aren’t trading in normal days lately.
  • Position close goal/limit:  I’d have to see a major change in the fundamentals of DIS to exit my position before I have a good profit.  Its P/E ratio is still above the average for the S&P 500, but I think it’s warranted.  I might end up being long these shares for an extended period, but I’m comfortable with that.

Closed Half of TLT Short Calls

A week ago, TLT was trading $5 higher and I sold my second leg of 10 TLT September naked calls.  This morning, while TLT was trading at $122.53, I bought to close those 10 TLT September $132 naked calls for $0.11 each and paid $114.23 including $4.23 in commission.  Since I received $1,145.73 last week, I finished the one-week old position with a realized gain of $1,031.50.

I made the decision to exit before expiration soon after I made the trade.  By the end of the first day, I had nearly half of my gain already.  By Thursday, I decided to enter a limit order at $0.11 and with the hope of getting out by the end of this week with a realized gain of more than $1,000.  It worked out even better than expected since the order hit this morning and now I can start eyeing new October strikes on any further TLT strength.

I still have the 10 September $124 naked calls in play and want to let them run for a good profit.  I’m down $164 on paper right now, but the strikes are almost $1.50 out of the money and I expect TLT to stay more subdued in the coming weeks.  As, we saw this morning, TLT could attempt to rally a few more times without much follow through.  I’m considering the October $127 or $128 strikes, but haven’t entered a new limit order yet.  I might get to it by the end of today since my next few days look pretty busy.  I haven’t bothered entering a new limit order to close my remaining September naked calls since they aren’t trading anywhere close to what I’m willing to pay to get out.

The only other limit order I have in place right now is on DIS, for an October $95 naked put.  If DIS dips again this week like it did this morning, my order should hit.  I priced the limit order ~$0.20 above the current bid/ask to only trigger on DIS weakness.  On strength, I’ll benefit with the 100 shares I’m already long.

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.