This morning I was looking at my TD Ameritrade (AMTD) account and started thinking that I had some more room to add exposure there since the LEAPS I sold months ago are far from being assigned. I don’t have a lot of cash available in that account so I turned to UCO knowing that I could get a lot of bang for the buck out of its options. My mindset for that account is different than my Interactive Brokers (IBKR) account. Originally I planned to keep the AMTD account focused on bonds and the IBKR account focused on stocks, ETFs and options. Then I saw all of the margin sitting there, unused. I talked myself into using that potential margin by selling far out of the money naked puts and just trying to bump my potential profit up a few percent each year. In theory, if stocks fell and my options were assigned it would be a good time to sell my bonds at their highs and buy stocks while they were low. So far, nothing has been assigned there and I’m just collecting time value. I schedule another small deposit to AMTD for tomorrow and decided to use the extra cash to cushion my new trade. I’d like to add more bonds to the account, but with yields so small right now (and thus prices high) I fear any gains from dividends could be lost quickly through a drop in prices. I might just buy more anyway and not try to time the market.
I don’t see oil taking a sustained fall off a cliff within the next 6-12 months, so selling out of the money UCO naked puts doesn’t seem to be a great risk. Since I’m trying to avoid an assignment I went with a trade that allows me a 27.54% cushion before I take a loss on it. While UCO was trading at $43.92 (before this morning’s weekly inventories were released) I sold one UCO January 2012 $35 naked put for $3.50 and received $339.25 after commissions. Even with the strike being so far out of the money I’m still sitting on a potential 20.9% annualized gain. Maybe I should’ve gone farther out of the money to lower the probability of assignment even more, but if UCO drops to my cost per share of $31.61 I’ll be ready to buy with little worry. Selling covered calls around the low $30s should continue to bring in good profits until oil wakes up again as it always does. (Famous last words?)
Ever day that oil moves higher I’m happier that I rolled my UCO covered call from a $42 strike to a $47 strike. Now I’m wondering if that was too low for August expiration also. I have a July $42 put in my IBKR account I was almost hoping would be assigned this week so I could lower my average cost per share, but that doesn’t look as likely now. Then again two more days is a long time in oil’s world. I’m not saying I’m upset that I’m not likely to be assigned another 100 shares yet. I just wouldn’t have minded if it happened and saw a benefit if it did by being able to write a strangle on my shares with closer strikes than my current strangle at August 34/47. By Friday I’ll make up my mind on what my next step is with UCO. If my July 42 strike still looks destined to expire worthless I might add an August 42 or higher put to go along with my other two August options.
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