At the risk of jumping in to this lengthy March rally too late into it, I decided to add S&P 500 exposure through the ETF SPY while it was down a little this morning. My thought process went something like this – I use the S&P 500 as my main benchmark to measure against my personal returns, I’m underinvested currently, I wanted a very large ETF, I wanted a cushion in case we get a small pull back. SPY was an obvious choice for the underlying with these motivations. Since I’m so underinvested I decided to sell an at the money naked put with the mentality that I have cash reserves available to buy in lower if the markets dip lower than I expect. Naked puts automatically build in the cushion I was looking for. I didn’t want to push my risk level too high after so many positive days for the markets for March so I didn’t go with SSO which is my typical choice.
While SPY was trading at $117.06 I sold one SPY May 117 naked put at $3.00 and received $298.99 after commissions. I started with only one put, but might add one or two more over the next couple of weeks and consider it an asset allocation of 20-30% of my holdings in the S&P 500. I’m still leaning to the bullish side, but would also still like a small dip sometime soon. My feeling is that some of this rally is end of the quarter window dressing, kind of like what we saw in December. If that’s correct, we will continue to rally or at least stay flat through the middle of next week and then maybe get that dip so many of us are waiting for during the first week or two of April.
This trade gives me almost $1,000 in premiums that I’ve brought in for the week. This is higher than my typical week, but it should be since this is the week after options expiration and I need to ramp up exposure quicker than in other weeks of the cycle. If I ran at this rate each week I’d be way over exposed to downside risk. If I’m still reaching for an end of the year gain of at least 15% I only need to make one more trade for the cycle. That’d be nice if I knew everything was going to go my way on each trade, but since that’s not a reality I have to sell more options to give me cushion for my mistakes. In a steady bull market overselling slightly gives an easy way to beat the indices. In a bear market it can make the losses greater. In a flat market it gives an option seller an opportunity to crush the markets’ performance, as I did in 2007.