Sold Covered Puts on TLT

Just as you can sell a covered call when long a stock or ETF, you can sell a covered put when short a stock or ETF.  I went short TLT after the markets closed on Friday from my short call position that moved against me.  I had a hedge, but sold it for a profit and took the assignment.  That gave me a realized gain of $432.72 on the $127 call I was short and then was assigned and a realized gain of $793.35 on the $129 call I was long.  In short, I’m sitting on a realized gain of $1,226.07, but have a bigger paper loss on the shares I’m short.

To make up some of that lost money, I sold covered puts based on the expectation that TLT will come back into the mid-$120s within a couple of months, if not days.  At some point in the next couple of years, TLT should be well under $115, but I’m not going to pretend like I’ll hold it that long.  While TLT was trading lower this morning at $130.42 I sold 10 TLT September $127 puts for $1.92 each and received $1,916.80 after commissions.  I’m still sitting on a big risk of TLT climbing higher while I’m short and I might add a new long call, but not yet.

Today’s premium intake brought my cost per share up to $130.14.  Remember that higher is better in this case since I’m short the shares.  If TLT can drop below my strike and is assigned I’ll make more than $3,000 on the series of trades.  If TLT stays high, I’ll continue with the covered calls until it drops.  If it goes much higher, I’ll have to raise my strike and might have to extend the duration of the options too.  With an hour left in the trading day, TLT is up another $1.40.  I’m glad I sold the puts when I did, but maybe should’ve used a higher strike to start with.  It’s going to be interesting to play this one out, but removing almost $2k of downside today helped ease my nerves.

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  1. Comment by mule

    Alex, Do you have to pay the ~$300 monthly dividend?

  2. Comment by Alex Fotopoulos

    Mule, I assume so. I’ll have to factor that into my costs whenever it hits. It looks like I’ll have to pay out ~$540 over the duration of these puts.

  3. Comment by Alex Fotopoulos

    I ended up paying $272.51 in dividends for my short position on 8/1/12. I have one more of those payments I’ll have to make before my puts expire.

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