I’ve been watching TLT climb like a machine since 2016 started. I expected every spike to be the last one and every dip to be the turning point to lasting lower prices. I should’ve bought a far out of the money hedge weeks ago, but figured I could weather it. Then I got a margin call warning yesterday afternoon. It wasn’t an actual margin call, but just a heads-up that I was running out of room in my account to hold my losing positions, both short and long.
I decided I’d wait until this morning to address it hoping TLT would drop some and my stock ETFs would start to recover. That didn’t pan out, so I had to make an adjustment. While TLT was trading at $131.62, I bought 20 TLT May $133 calls for $3.569 each and sold 10 TLT May $126 calls for $7.216 each. The short calls paid for the long calls and I received $54.52 net in premiums after paying $23.48 in commission.
By buying two calls for every one call I sold, I hedged half of my TLT position, but left a wide gap to have temporary losses. I don’t think TLT will stay above $130 for long, but …
January was not an easy month to stomach, but it really wasn’t as bad as many investors might feel. The first couple of weeks were gut-wrenching for bulls, but we ended with a nice rally to cut losses in half. My account looks worse than it really is. That is to say my account balance is down far more than the indexes, but I’m sitting on 20 TLT naked calls that are worth approximately $7,000. I don’t have $7,000 in time value that is set to expire in the near-term, but I do believe TLT will drop over the next few weeks or months and I’ll get the reversal I need. On top of the $7,000 I’ll get back eventually, I’ll also sell covered puts if I’m pushed into a short position due to naked call assignments. The current $124 and $125 strike (the same strikes as my naked calls) puts have fat premiums that will make the reversal in bond prices even more profitable for me.
The best trade I made over the past few weeks was rolling my January TLT naked calls out and up. I bought back my January $123 naked calls and sold March $125 calls. This option …
January has been even worse than most bears expected. I’ve been in the camp that we’re oversold and the mass selling should subside sooner than later. Apparently, we aren’t there yet. I regret not adding more long puts like I planned to do after closing my last ones for a profit. I also regret being overly bullish (cocky?) on my Disney (DIS) predictions.
My only option expiring today is one DIS January $115 naked put. I’ll be assigned 100 shares with DIS below $95. My cost per share will be $112.01 after deducting the premiums I received. I’d like to add more DIS, but I’m trying to stick to my rules of not catching a falling knife. I thought DIS would’ve bottomed well before it got this low again and I’ve been wrong. It will hit a turning point and I’ll have to decide at that point if I still like it enough to sell another naked put.
I’m not selling covered calls on any of my positions yet. I expect a sharp snap back whenever the sentiment shifts. I should’ve had covered calls in place coming into the year, but since I didn’t, I don’t want to cut my upside potential yet.
The chart below shows the monthly prices for the past 10 years on SPY, an S&P 500 Index ETF, after closing the week at $191.92 on January 8, 2016.
Traders have to broaden their time horizons when an index breaks through short-term technical support. The daily and weekly charts for SPY offer little guidance for where the ETF could find its next area of support, but a multi-year chart using monthly bars helps bring clarity in a volatile time.
Stocks have been in a sustained bull market since bottoming in March 2009 and have traded within a broadening trading channel for this seven-year period. So far, each move to the trend line of higher lows has brought out calls that the end is near, but every drop has been a buying opportunity. Eventually this rubber band effect will end and the supportive trend line will break. Until this technical event hits the charts, traders will continue to profit from the dips with the risk of a collapse increasing at every test of the trend line.
TLT has been creeping towards my January naked call strike since the day after I sold this lot of calls. I waited out the peak in December when TLT hit $124.10, but decided to take a profit today and roll the position out to March at a higher strike too. While TLT was trading at $122.16, I bought to close 10 TLT January $123 naked calls for $0.75 and paid $757.92 including $7.92 in commission. Immediately after this order hit, I placed my new order and while TLT was still trading at $122.16, I sold 10 TLT March $125 naked calls for $1.60 each and received $1,595.73 after paying $4.27 in commission.
I didn’t sell this as a single diagonal calendar spread because the prices were shifting so quickly in this morning’s volatile market that I wanted to be certain that my orders hit. TLT was bouncing around enough that I didn’t want to get caught on the wrong side of a limit order and miss rolling the calls.
I brought in $965.75 when sold the January calls on November 6. So today’s buy back gave me a realized gain of $207.83. I’m really happy with that considering how high TLT traded just …
Once again, I proved that selling options can beat buy and hold investing. 2015 was an even better year for me than 2014 and it was more fun since the major indexes did very little to please investors. I finished 2015 off of my highs reached a few days earlier and below my ending balance from November, but I exceeded my growth goal for the year. The last time I beat the indexes by such a large margin was in 2007 when I gained 26.27% and the S&P 500 gained 3.53%. 2007 and 2015 were very similar in their small ebbs and flows that are built for option sellers to exploit. Following 2007, 2008 was a terrible year for me and I am set-up not to make the same mistake again if we get a bad bear market (not that I think we are due for one yet).
I ended December with a Net Liquidation Value (NLV) of $116,743.17 and a Net Asset Value (NAV) of $116,740.30 according to Interactive Brokers (IB) after finishing November with an NLV of $118,231.16. That gave me a loss of $1,487.99 (~1.26%) on paper for December and a realized gain for the month of $3,527.35 on six closing trades. Quicken reported that I have an account value of …
As expected, stocks rose this morning and then faded. I expected the fade to come later in the day or maybe even tomorrow. When I saw sellers coming in to take over the bulls’ fun, I decided it was time to take some profits and start setting up my end of the year payout.
I started with SPY. While SPY was trading at $200.30, I bought to close one SPY March 2016 $195 naked put for $5.69 and paid $570.09 including $1.09 in commission. This was the put I sold in April as part of a vertical spread. I took the profit on the long put in September after stocks bottomed in late August and held onto this put with the belief that stocks’ worst days were over.
I’m not convinced the next few months will be easy for bulls, so I thought it was worth taking a realized gain of $259.80 while I still had it. Even though this gain was smaller than it would’ve been a few days ago, it’s definitely good to have profited on both legs of my vertical put spread. If I think the mood on the market has changed, I’ll sell a new naked put, but I’m …
Today’s option expiration was easy. It wasn’t fun, but was certainly easy since I didn’t have to do anything outside of see my balance drop again. I thought my SPY covered call might get assigned by the end of the week, but it didn’t. I had one of my clients in the same position and his SPY December $203 covered calls were assigned. That’s a good thing considering that SPY fell to $200.02 at the close and he got out with a profit before trading started today. The bad part is that I didn’t luck out with him. My one SPY December $203 covered call expired worthless and I’ll hold onto my 100 shares of SPY, for now. I’ll have a realized gain of $362.27 from this call on top of SPY gaining $1.36.
MDY wasn’t close to being assigned. In fact, the mid-cap ETF is down $7.79 from where it was when I sold the covered call. It rallied in between when I sold this covered call and today, but didn’t climb above my strike at any point. My one MDY December $270 covered call expired worthless and I’ll keep my 100 shares of MDY. I’ll have a realized gain of …
What’s cool is that the S&P 500 is down 32 points (1.55%) as I write this and my account is up over $1,000 for the day.
The limit order I had on my TLT December naked calls hit today. While TLT was trading at $119.97, I bought to close 10 TLT December $126 naked calls for $0.10 each and paid $104.22 including $4.22 in commission. I could look at this trade and think that I just threw away $104.22 to close a position that now seems like it doesn’t have a chance of being assigned before expiration, but I’ve learned that it’s better to remove risk when it’s cheap to do so. Sometimes the position stays out of the money and the trade was a waste, but other times the underlying equity reverses and you are burned. I’d rather waste a closing trade occasionally to avoid the rare times when I get surprised and lose big chunks of money.
TLT fell more than 3% at one point today and could recover quickly too. I don’t think it’ll make it above $126 in the next two weeks and a day, but I don’t have to worry about this lot of calls anymore if …