Added to SSO Position

A few weeks ago I opened a small SSO position with the idea that if it went up I’d just pocket the profit and move on and if it went against me (which it did) I wouldn’t lose much and would probably add to the position if SSO fell further.  SSO has done that and I stuck with my plan.  While SSO was trading at $34.93 this morning I sold two SSO March 32 naked puts at $1.10 each and received $218.57 after commissions.  This pulls my S&P 500 exposure up to the equivalent of almost $20,000 since I’m using a double ETF.  I have less than $10,000 of underlying value at risk if the world ended and SSO went to $0.00.

I chose this trade because I think that over the next five and half weeks the S&P 500 only has a likely downside of no more than 5% to put it in line with the 200 day moving average.  The trade kind of just developed on its own from there.  Using the 5% downside assumption for the S&P 500 I checked what a 10% drop in SSO would be.  At the time SSO was trading at $35.09 and I estimated it could fall $3.51 from there to $31.58.  I checked the nearby strikes to see what my March strike choices would be near $31.58 and saw the March 32 strike looked best for me.  The bid/ask was around 1.05/1.07 at the time and I rationalized that there’s a possibility that my estimate might not be precisely accurate and wanted give myself a little extra cushion.  The 32 strike still offers a good annualized gain with a cushion from here so it made sense to me to go with it.  My cushion before turning this trade into a loss goes all the way down to $30.91.

If these options are assigned along with my first leg (one March 37 put) I’ll have an average cost per share of $33.67.  When I subtract the premiums I’ve received from $33.67 my cost per share drops to $32.36 on 300 shares.  I should be able to manage the position from there with covered calls unless I decide to leave the 300 assigned shares uncovered with the expectation that we’ll get a rally soon after.  Obviously that’ll be a decision when the time comes.  On the other hand, the S&P 500 could be close to a short term bottom here and if that’s the case I’ll pocket the new premiums and will make money back on the first leg losing intrinsic value.