Rolled TLT Naked Calls Out and Up

As I mentioned the other day, I reached my limit for selling naked calls on TLT.  So, I had to close some of my current short calls to open up margin.  While TLT was trading at $122.54, I bought to close 10 TLT October $125 naked calls for $0.19 and paid $196.07 including $6.07 in commission.  I brought in $1,013.89 when I sold these calls a month ago.  Buying them back today gave me a realized gain of $817.82.

I could’ve waited to let these calls expire worthless in a week and a half, but I wanted to sell new December calls while the premiums were elevated.  I was away from my office when my first order hit, so TLT was able to fall $0.50 between my orders trading and I missed out on a few bucks.  While TLT was trading at $122.04, I sold 10 TLT December $125 naked calls for $1.46 each and received $1,453.89 after paying $6.11 in commission.

I might have been able to do better on the net intake if I had made the trade a few days ago, but I’m not really sure since I didn’t log what each premium was trading for then.  The October calls’ theta (time value) has been dropping quicker than the December calls’ theta has been falling (theta declines quicker as expiration gets closer).  Both premiums have fallen simply because the price of TLT has fallen and I didn’t want to wait it out any longer to miss a good opportunity.  That opportunity was to take a profit of more than $800 while raising my strike by a dollar and adding nine weeks of duration during which time I expect TLT to remain volatile with a downward bias.  Adding a higher premium than I sold the last two times was a bonus since I raised my strike.  The higher premium wasn’t just a gift.  I’m accepting more risk by selling more than two months away.  That’s technically the reason for the higher premium, but I think I’m safer having more time on my side for the interest rates to drop by the middle of December.

Sold SPY & MDY December Covered Calls

I’ve enjoyed the rally over the past week and the fact that my account balance is back to within about 2% of my highs of the year.  Since we’ve just had a strong multi-day bounce off the recent lows, I figured that we didn’t have too much more upside in the immediate future.  I started looking for a moment when stocks were starting to sputter and saw it this morning.  I think the upside is fairly limited for the next couple of months and I decided today was a good day to sell covered calls on more of my positions.  If I’m assigned, my account balance will be at new highs for the year and I’ll be able to start over with a fresh outlook.

I already sold covered calls on my DIS and IWM shares and wanted to bring in more cash for my SPY and MDY shares.  I started with MDY since I was more confident with my decision.  While MDY was trading at $257.54 ($0.11 below the high of the day), I sold one MDY December $270 covered call for $2.30 and received $229.75 after paying $0.25 in commission.  I knew I didn’t want to go out any further than December and the November options weren’t offering high enough premiums.

Once settled on December, I debated the $265 and $270 strikes.  I could’ve pulled in $160 more in premiums, but if assigned, I would’ve missed out on $340.  MDY could hit resistance in the low $260, but I could also see a December rally pulling it up to $270, around its 200-day moving average.  It was a hard decision and I might end up selling a $265 call within a week or so if it looks like MDY doesn’t have legs.  I’ll decide if I want to leave this $270 call in place by then or if I close it for a profit.

I turned my attention to SPY immediately after I placed my MDY order and my new order hit less than eight minutes after the first order.  While SPY was trading at $198.66 ($0.32 below the high of the day), I sold one SPY December $203 covered call for $3.63 and received $362.27 after paying $0.73 in commission.  I was more aggressive with my SPY order, meaning I used a strike closer to the money, because I was already second-guessing my MDY strike and opted to target a higher premium over leaving more room for the ETF to climb.

Again, December was an easy choice for the same reasons I said above.  My debate was over which strike.  I compared $202, $203 and $204.  I wanted to leave a few dollars of upside before hitting the strike and wanted at least $3.00 of premium.  These three strikes fit the parameters, so I just had to narrow it down.  I knocked out the $204 strike first because I don’t think SPY will hit $207.08 (strike plus premium) by December expiration.  I eliminated the $202 strike because it was only worth $0.47 more and I thought the extra little bit of upside clearance was worth giving up the additional premium.  As with my MDY mindset, I might sell a lower strike SPY call if it looks like the market is weakening again.

If assigned on both of these, I’ll take a realized loss on each series of trades.  Maybe the potential realized losses allowed emotions to play a role in using higher strikes than I should have.  If I move my strikes lower on either, I’ll probably start with SPY since I have a SPY March $195 naked put in play already.  Using a lower covered call would help cushion the fall if SPY falls below my put’s strike.  For now, I’m glad to have something in place to lock in some profits if the market moves sideways through December.

I tried to sell another 10 TLT naked calls on Friday when the ETF spiked, but got a pop-up that I would be over my margin limits.  I was able to sell 10 TLT December $130 calls for a client and she’s up over $800 two days later.  I could’ve sold eight naked calls, but figured I would’ve been risking a margin call if TLT shot up much more.  I didn’t want to sell five calls, but I should have.  It would’ve been better than none.  I also could’ve sold a call spread.  Instead, I reasoned that my October calls were set to expire in two weeks and I could wait it out and keep my risk somewhat in check.

SPY – 3 Month Chart – Monday is Key

The chart below shows the daily prices for the past three months on SPY, an S&P 500 Index ETF, after closing the week at $195.00 on October 2, 2015.

SPY went through a long consolidation period from early February through mid-August when it did not waiver more than nine points from its high to low.  No news could push the large-cap ETF below 204 or above 214, with the majority of days trading between 207 and 212.  The 10, 20 and 50-day moving averages all converged during the final month of tranquility as SPY’s trading range narrowed to an even tighter range.  This period of complacency ended in mid-August when SPY fell in a two-day panic attack as low as 182.40 before recovering to 189.50 by the end of the day.

For some traders, the tantrum seemed over.  SPY had finally had its long-overdue correction with a 14.7% drop from an intraday high of $213.78 in May.  To technical traders, the recovery seemed false and merely what is referred to as a “dead cat bounce” (as in, even a dead cat will bounce if it falls hard enough).  To truly reset technically, SPY needed to retrace most, if not all, of its collapse on a calmer descent.

On Monday, September 29, SPY made it as low as $186.93 before closing above its previous day’s closing price.  The next three days followed suit with better closes each day.  The biggest challenge came on Friday after Thursday’s advance was halted at its 10-day moving average and its two-week trend line of lower highs.  The poor employment report on Friday morning added onto the technical resistance and it looked like the recovery might stall after only three days.  After dropping 3.01 points in the first hour of trading, SPY rallied 3.1% to finish at $195.0 close to its high of the day, above the descending trend line that stopped it the day before and above its 10 and 20-day moving averages.

To give the rally credibility, the bulls need SPY to stay above $195 on Monday.  Moving averages and trend lines are very important to technical traders, which makes Monday’s trading range a psychological make it or break it point.  The area around $195 has been important resistance and support since the correction hit SPY.  Closing above $195 on Monday will show traders that the past four days of better prices is more than a short-covering rally.  In addition, the Williams %R indicator moved above the oversold range on Wednesday and needs three confirmation days to make the signal more reliable.  A higher close on Monday will give this momentum indicator its third confirmation day.  A lower close on Monday could take the legs out from the rally and cause a retest of the August lows.

We are far from seeing an all-clear signal above $195.  Another trend line of lower highs has moved below $200 and the 50-day moving average is just above $200 and falling.  Both of these points of potential resistance will draw a lot of attention in the coming days if SPY’s push higher continues.  A move above the 50-day moving average will give the market a chance to trade up to its previous highs from the spring again.  The chart will need a completely new technical assessment by the time SPY reaches the $210-214 range again.


Sold Calls on TLT, DIS and IWM

I was able to bring in $2,069.17 in premiums today by selling calls on TLT, DIS and IWM and rolling my DIS naked put higher.  The TLT calls are naked, meaning I don’t have any shares I’m covering.  The DIS and IWM calls are covering shares I already own.  I was planning to make these trades on Monday, but wanted to see if the market’s strength at the beginning of the week would hold.  It didn’t and I opted to wait until today to see if we could get a bounce.  The bounce turned out to be a temporary flattening and I decided to go ahead and bring in the premiums while I could.

I started with TLT since it was beginning to weaken this morning after a very strong day yesterday.  While TLT was trading at $121.34, I sold 10 TLT November $125 naked calls for $1.25 each and received $1,245.74 after paying $4.26 in commission.  I’m simply repeating the type of order that has worked for me most of this year.  I think TLT has limited upside and I won’t mind shorting it above $125.  I started with an order at the $126 strike, but when TLT started losing value, I lowered my strike and found a buyer.  I could’ve done better by applying more patience.  Based on the bid/ask posted while I write this mid-day, I could’ve sold these same calls for $1.38.  Still, if I can pocket $1,245.74 in two months, I’ll be very happy, especially if my 10 TLT October $125 naked calls expire worthless too.

I moved to Disney (DIS) next.  I came into the day long 100 shares and short one DIS October $95 naked put.  I’ve been hesitant to sell a covered call on my shares since I’m bullish on DIS and expect it to recover before the end of the year.  I decided I could sell a covered call far out of the money to bring in a little money if I also raised my naked put’s strike at the same time to bring in more premiums.  While DIS was trading at $101.76, I bought to close my one DIS October $95 naked put for $0.78 and at the same time, I sold one DIS November $100 naked put for $3.60.  I received $279.81 for the spread after paying $2.19 in commission.

I sold a DIS covered call immediately after I rolled my put higher and farther out on the calendar.  While DIS was trading at $101.73, I sold one DIS November $110 covered call for $1.26 and received $124.90 after paying $1.10 in commission.  If my covered call isn’t assigned, I’ll make 1.23% (7.53% annualized) from the premium.  If it is assigned, I’ll make 9.36% (57.26% annualized) from the current price.  Ideally, DIS will finish the November expiration around $109-110 so I can take a profit on the call without selling my shares just before the Star Wars movies hit the theaters.  If the covered call is assigned, my put will expire worthless and I’ll be up over $1,200 from where I was after these DIS trades.

I received $299.57 when I sold the DIS October $95 put a few weeks ago and paid $79.09 to close it today.  That gave me a realized gain of $220.48 on the trade.  By rolling the strike higher, I was able to stomach the risk of a possible option assignment on my covered call.  If my new $100 strike naked put is assigned, I will have a lower average cost per share and will be able to work a profit from this series of trades even easier.

DIS Naked Put Risk/Reward Breakdown

  • Potential profit: $358.90
  • Potential return: 3.72%, 22.77% annualized
  • Breakeven price: $96.41
  • Downside protection: 5.26%
  • Recent high: $122.07 on 8/4/15
  • Cushion from recent high: 21.02%
  • Expected support:  $99.21 was the intraday low on September 1.  I’d like to see it hold support.  DIS is already below its 10, 20, 50, 100 and 200-day moving averages, so the easiest technical guidance to use comes from previous support.  If $99.21 doesn’t hold, we could see DIS hit $95.79, where it reversed after closing near its low of the day on August 25.  I don’t think we’ll see any trading below $95.79 unless it’s for a few minutes at the open of a panic day.
  • Position close goal/limit:  I’m willing to take an assignment on DIS and do not plan to sell my shares unless Star Wars disappoints at the box office, Star Wars merchandise doesn’t sell well during Christmas and Shanghai Disney tanks.  In other words, I’m comfortable selling covered calls far out of the money and waiting for it to recover.

I went back and forth on my decision to sell covered calls on IWM, but finally opted to bring in some cash today at the risk of missing out on more upside down the road.  While IWM was trading at $113.24, I sold three IWM November $118 covered calls for $1.40 each and received $418.72 after paying $1.28 in commission.  If these calls are not assigned, I’ll make 1.23% (7.52% annualized) based on the current price.  If they are assigned, I’ll make 5.43% (33.24% annualized).  I would end up taking a loss on the shares if they are assigned in November, but I’ll also gain more than $900 on the two IWM January $110 naked puts I still have in play.  At this point of the market cycle and the time of the year, I’d be happy to have my IWM exposure increase my account value by more than $2,750 in two months.

Sold TLT October Naked Calls

Today looked like it was going to continue how it ended yesterday – with the bull market regaining its footing.  That’s not how it played out and it didn’t take long to see the tide was turning.  I did nothing in my account for a while, waiting to see how the day would settle in.  By early afternoon, I had seen stocks fall to break even and bonds climb to break even.  I thought there might be a little more motion in the day, but didn’t expect the complete reversal we ended up with since both stocks and bonds had flattened for a couple of hours.

My TLT September $124 naked calls had traded as low as $0.13 this morning and were only up $0.05 – 0.10 when I placed my limit order about $0.15 above the current trading range.  (They ended the day closer to $0.38/0.39.)  I figured we might see a jump again for TLT either tomorrow or Friday and entered a limit order that would last until mid-next week.  While TLT was trading at $121.67, I sold 10 TLT October $125 naked calls for $1.02 each and received $1,013.89 after paying $6.11 in commission.

When I first started considering placing the limit order at the $125 strike instead of at the $127 strike or higher, I was thinking my September $124 calls were expiring this coming Friday.  I clued in before I made the trade that I had another week to go after this week, but had convinced myself that the risk was low for TLT to regain that much ground that quickly.  I still expect it to work out for me, but might have pushed for a higher premium if I had known the order was going to hit today.

Within an hour of placing my trade, TLT spiked about a half percent and I was able to sell at the high trade of the day.  I don’t know if I could’ve done better, because the order hit while I was away from my desk.  I do know that getting the high trade of the day is a good thing when you are the seller.

This type of order is what I love about being fully invested.  I can place limit orders that won’t matter if they aren’t triggered – meaning I can be patient.  If they are triggered, I tend to get one of the better trades of the day, assuming we aren’t part of a flash crash.  I’ve thought about entering some limit orders for other equities, far out of the money at premiums well above the ask, but after buying back my hedges last week, I’m in deep enough for now.  If we move more than 3-4% in either direction by the end of next week, I might go ahead and move on another stock option trade.

Sold IWM January Hedge

When I saw the market sell-off again this morning, I saw it as an opportunity.  I was already planning to sell my IWM hedge, but realized I could raise my limit order and make a better profit than originally planned.  I raised my limit order again pre-market, just to be safe that I didn’t get a low trade on a steep sell-off at the open.  I raised it too much and ended up having to pull it in lower than the premium I raised it to yesterday afternoon, but better than my first order entry.  Make sense?

While IWM was trading at $112.89, I sold to close two IWM January 2016 $124 puts for $13.45 each and received $2689.10 after paying $0.90 in commissions.  I paid $2,001.21 for these puts in late March, which makes my realized gain $687.89.  I’m still short the other side of the put spread I started with.  These IWM January 2016 $110 naked puts are trading around $5.90 right now and are almost $3.00 out of the money.  Adding the remaining premium and the amount they are out of the money, I have a cushion of nearly 8% before I would say I made a mistake for not buying the naked puts back today too.

I think we’re within a few percent of turning around and expect my two IWM January $110 naked puts to stay out of the money by expiration or at least not be as much as $5.90 in the money.  I’ll buy the puts back if I have the opportunity to get out sooner than expiration with a decent profit.  If I’m wrong about when the markets will turn around, I could be in trouble.  Since I removed my hedges, I will be over-invested if all of my puts are assigned.

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.