Added SPY & IWM Naked Puts

As planned I was ready to jump in this morning for more exposure, but the four main equity index ETFs I watch, DIA, SPY, MDY and IWM were all trading along their trend lines of higher highs.  I couldn’t stomach getting in at those levels, even with the risk of being left behind in the rally that continues to mystify me.  It didn’t take long and reality set in.  The markets started to sell off and I made my first trade of the day at 10:52, after SPY had made it half the way back down through its trading channel.  While SPY was trading at $132.39 I sold one SPY February $134 naked put for $2.83 and received $282.23 after commissions.

I kept the expiration to the closest month to target a quicker profit and keep the contract easier to exit if we see a bigger momentum shift.  More than likely I won’t buy it back, but will be able to work a covered call with it quicker this way.  By selling in the money with such a short time horizon I didn’t gain a big advantage.  I only have a 0.92% cushion.  The profit potential is 2.15% or 32.9% annualized.  I thought about just buying the shares, but I’d rather have 0.92% cushion than none.  More than likely this trade will lead me into owning 100 shares of SPY.  Adding another 2.15% in the next three weeks might be all we could ask out of this market anyway.  Any more than that so soon and it really might be a better time to stay in cash or start shorting the market. Either way, I get to re-evaluate in the near term.

Hours later and another few points lower for the indexes I made another trade.  My SPY trade took the haste out of my trading since I had more exposure again and let me be more patient with this trade.  While IWM was trading at $79.15 I sold one IWM March $77 naked put for $2.02 and received $200.97 after commissions.  Since I’m not convinced how long this rally has legs, I sold this put out of the money and gave myself a longer time horizon.  With that I gained a 5.26% buffer before I take a loss.  I still stand to make 2.68%, 19.1% annualized, if it works out.  If I’m assigned the small cap ETF shares, then I’ll be set-up to start the first quarter off with a good lead over the indexes.  If I’m forced to buy, my cost per share will be $74.99.  That’s just below the 50% retracement level using Fibonacci lines from the December intraday low through today’s intraday high.  That’s also the point of resistance during November and December and then was support (at $75.61) in January.  This is going to be a key level to watch if/when IWM gets back down there.

My plan on this option is to make a small gain while the ETF losses value.  If I was more patient I would’ve waited for small caps to sell off more first, but I’m not confident enough in how low it’ll go before turning higher again.  I needed room to profit on a continued rally.  I’d be a straight out bear if the trend line of higher lows had broken, but the indicators are still pointing higher.  This leg of the rally is just lasting longer than most of the recent ones.  That simple fact doesn’t mean it’s over, it just means I’m being more cautious since the easy money is done.

I’m 81% invested now and still want to add more, but don’t have to chase as hard after these trades.  I plan for my next trades to be out of the money puts again.  Ideally I’ll be able to make trades with a minimum of 15% annualized gains and lower risk.  I need the VIX to pick up a little more to help me with that.