Options Expiration – February 2012

Last week I rolled two February options (DIA & IWM) higher and farther out.  That left me with only two options that expired today.  I went one for two on picking the right strikes for these two that lasted until today.  I still made a profit on both, but one was only a few bucks while the other was a full profit.  I opened new puts on both as each closed/expired today.

1 TLT February $118 naked put – This would have finished in the money, but I closed it in the morning, giving me a partial profit ($41.67).  While TLT was trading at $116.24 I bought to close one TLT February $118 naked put for $1.78 and paid $178.60 with commissions.  A few minutes later, while TLT was trading at $116.27 I sold to open one TLT March $115 naked put for $1.64 and received $162.97 after commissions.  I don’t know why I didn’t do this as a single diagonal spread order.  I’ll blame my past two days of being sick and barely eating on my weak mind.  I thought about taking the option assignment at $118 and selling a covered call, but when I compared the two choices, the naked put gave me a slightly better return, even with the March dividend included.  I stand to make a 1.44% gain (17.8% annualized) on the new naked put if it works out.  This gives me a 2.5% cushion before I take a loss below $113.37.  I probably used a strike that’s lower and more conservative than I needed to.  I still think the $114.50-115.00 area will hold support, but if not the slide could get steep quickly.  Also, I already have another TLT March $115 put in place, so my exposure is enough that I didn’t have to push the limit on my trade.

1 SPY February $134 naked put – This will finish out of the money giving me a full profit.  Knowing that my February put had virtually no chance of being assigned with only a handful of hours to go in the day, I decided to write another contract.  While trading at $136.12 I sold one SPY April $137 naked put for $4.49 and received $448.23 after commissions.  I went in the money with this one to give myself some more profit potential.  I’m 104% invested now, but 21% of that is in TLT which should move inversely to stocks.  Out of the remaining stocks allocation, everything is in out of the money puts or in the money calls.  I don’t have to rely on my new positions to soften any stock reversal.  My older positions are doing that enough as it is.  I went out to April on this one because every one of my other options expires in March.  I needed something farther out there.  It also gives SPY more time to move above $137 if it stumbles before then, which I actually think it will do.  If SPY does close above $137 when April options expire, I’ll make 3.38% (19.3% annualized) even while reducing my downside risk by 2.69%.  I’m still in the camp that believes there is more upside room in 2012 from today’s levels.  At the same time, I don’t think we only move higher from here.  A good 4-5% mini-correction would be very healthy for the markets right now.  If we get that, I think 2012 could end with an 18-20% gain.  If the markets wait too long before giving some back, we could have an ugly summer.