As I mentioned a couple of days ago I’m off on a new adventure in rotating my account to longer term options (LEAPS). Technically LEAPS are defined as having a longer duration than nine months, so this trade today was just a basic option, but nearly six months out. While SSO was trading at $47.89 I sold one SSO June 2011 $50 naked put for $6.10 and received $609.31 after commissions. I plan to add five more SSO puts in the coming weeks while I set up my new model which will include at least 75% of my account in longer term options and LEAPS, but with the run the market has been on recently I have to wonder if we’ll get some solid down days in the near future that will give me better entry points. If not, I’ll keep creeping in slowly anyway.
Originally I planned to sell the January 2012 expiration for SSO, but when I got down to comparing the two I didn’t see much advantage in the longer expiration. While I was able to sell the June strike for just over $6.00 the January strike (that’s seven months longer, more than twice the duration for those of you who might be calendar challenged) looks like it would sell for around $9.00. The three dollar difference didn’t seem worth the potential smoothing out of prices over a longer period for me. I only need a 4.41% gain in SSO to take a full profit and can handle an 8.32% loss in SSO before I start to take a loss on my trade. If SSO stays flat I’m looking at a 9.09% gain and that’s not even annualized. For SSO to gain 4.41% the SPX needs to gain at least half of that, 2.205%, but due to the inexact nature of SSO I really think 3% might be a better target. 3% in six months doesn’t seem like too much of a stretch when I expect the year to end up 10% or 15-18% for SSO.
As I’ve mentioned in the past, I won’t be shocked to see the S&P 500 (and therefore SSO too) come down some in January after the end of the year rally dwindles down and some other random macroeconomic fear peaks its head out. I’m trying to hold out some buying power for when that happens, but if it doesn’t come to fruition on my personal schedule I wanted to be sure to have some more skin in the game, albeit with a good cushion with my premium.
On another note – For those of you who don’t check for post comments on a regular basis, a reader suggested I ask all of you for input on what has worked for you and what hasn’t when developing and working your own trading models. If you are open to sharing, I’d love to hear your input.
here is my trading model which has worked for me. i will give you an example of a real trade which i executed last week. while GE was trading at $17.70..sold march $19 put for $1.75 and bought sept $16 put for $1.05. If GE goes up in the next four months (which it has so far)..I make money up to $100. If it goes down then i will sell the long put with profit and my short put will get exercised. I will write covered call on it then. my overall cost of the trade will be much lower with the profit on the long put. The beauty is that I only need $300 for margin so with $100 profit..that’s 33% return in 4 months. If the market crashes tomorrow…i will lose only $300 and i can make that up easily by writing covered call. So far this model has worked for me on all my trades last year. I try to buy when there is a correction in stock..like GE just had. Any q email me.
one minor correction from my last comment..if the GE tanked tomorrow..the most i can lose would be $230, not $300 since I received $70 when I executed the trade ($175 – $105 = $70). If that happens then i will sell the long and keep the short and write covered call on it. i shouldn’t have any problem making that up.
Generally, I am looking for retirement cash flow.
* I favor selling puts on stocks that pay dividends in case I end up owning the stock.
* I will sell puts on a non-dividend stock where I can receive a good premium and there is a good story.
* I will occasionally buy a stock that pays a good dividend.
* I sell out of the money calls on all of the stocks that I own.
* I will occasionally roll out a call on a good dividend paying stock rather than have it called away.
* I will occasionally roll out a call on a stock if I can get additional premium and roll up to a higher strike price. I often do this to continue to hold stocks that pay a favorable dividend on my current basis.
* I favor selling puts and calls for shorter periods over longer periods.
* Usually the closest month has the higher percentage return.
* This allows (forces) me to evaluate the stock more often.
* Options that are rolled out often violate this rule.
When I speak of good premiums or dividends I am biased toward greater than 4% annualized dividend returns and option premiums greater than 10% annualized on my basis. Not real aggressive but as I am just about 64 I have scaled back my tollerance for risk.
@ Mateen, how many of theses trades do you hold at one time? You have a potential 33% return on the amount at risk, but it seems you need to have cash (or margin) available for the potential option assignment. It definitely looks like a much safer way to trade with the hedge in place.
@ Bill, I like your strategy too. I tried rolling my options monthly, but found I don’t have the time to keep up with it and my clients’ accounts and my other job. It’s hard to make an argument against dividend paying stocks.
I hold about 5 to 6 positions at a time and have enough margin to cover that. I can also roll out the long put if needed or the worst case scenario…take a $230 loss. I also hold about 5 to 6 naked put/covered call positions so this strategy gives me valuable hedge during market correction.