Sold Options on IWM & MDY

As I mentioned yesterday, I am under-invested right now and wanted to remedy that with some more equity exposure through an index ETF.  I started with IWM this morning as it was sitting below yesterday’s close.  While IWM was trading at $78.25 I sold one IWM February $78 naked put for $1.70 and received $168.97 after commissions.  I sold out of the money slightly with the expectation that small caps are due for a step lower before going much higher.  I kept the expiration to the closest month to speed up the time decay within the option.  If I see IWM rolling over below support I might dump this option quickly and get back in at a lower strike.  Since I’m not invested enough elsewhere I could just let this one play out with little overall risk.

I didn’t wait for this expected dip because I don’t think any move lower is going to last too long and I’m not always perfect on exact date picking.  Having out of the money option exposure gives me the best of both sides.  I make money if IWM stays flat or moves higher and don’t lose as much on the next step backward, whenever it gets here.  As it stands, I could make 2.22% or 32.0% annualized if it works out.  I only have 2.48% downside to cushion any the trade before I take a loss, but with only three and a half weeks to go on the contract that’s not too bad.

I thought about selling a naked put on MDY next, but since I was already long 100 shares I thought I should sell covered calls on it first.  I might circle back as early as tomorrow to sell naked puts on MDY too.  While MDY was trading at $169.77 I sold one MDY March $175 covered call for $2.50 and received $249.37 after commissions.  If MDY stays within the trading channel it’s in now I will have left money on the table.  I gave the position another 4.55% of upside potential from here.  I’ll be happy to walk away with that in my pocket if the covered call is assigned.  I’m already up more than 5.5% for the year, so another 4.55% would be a great place for me to reassess what I’m targeting.  Then again, the 4.55% doesn’t cover my entire account, just this $17,000.

In hindsight I don’t know if I should’ve sold these covered calls yet since I don’t have much other upside potential in place.  It’s easy to second guess myself since the indexes shot up after I made my trade.  The SPX bounced from its trend line of higher lows all of the way up to its trend line of higher highs and used its 10 day moving average as support again.  In the past when the SPX has hit its upper trend line it moves sideways to lower for the next few days.  That’s not to say it’s going to fall below the 10 day moving average yet.  Until it does, the upward bias remains in place and I know I should’ve stayed invested deeper.