Sold SPY Put Spread for January

Since the markets continue to melt higher, I thought I should ease in with some more exposure.  Instead of leaving myself exposed big to the next panic, I decided to sell put spreads again.  I was running short on time and since I was placing an order for a client, I decided to piggy-back on his order and add my contracts to the same trade.  This kept me from having to run multiple different models for my trade when I had already done it for him.  I already had large cap positions using naked puts on DIA and SPY, but didn’t think it would hurt to add more using SPY since the entire market has been moving in unison for the most part lately.

While SPY was trading at $143.69 I sold two SPY January $147 puts for $5.185 and bought two January $139 puts for $1.43 each.  I received $748.97 after paying $2.03 in commission on the $8 spread. I sold the short side in the money to give myself more upside potential.  I don’t think the S&P 500 is going to stay flat over the next five and a half weeks and want to have the possibility to gain more while not being reckless if/when things go wrong.

I’m planning to let this trade run its course, but might drop out early if I see headwinds kicking up again if SPY reaches its 2012 highs before January expiration.  Today’s gains made the charts that already looked bullish even better looking as recent resistance was broken.  This was my first trade of the month and wonder if I’m adding more in too late.  The charts say there’s more room to run, but any seriously wrong wording from Washington and the party will be over before it really got going.

Risk/Reward Breakdown:

  • Potential profit: $748.97
  • Money at risk: $851.03
  • Potential put spread return: 88.01%, 65.8% per month
  • Upside potential based on cash reserves (not that I have this cash in reserves): 2.61%
  • Downside cushion: no cushion, need a gain of 0.17% to break even
  • Downside risk based on cash reserves needed: 2.97%
  • Timing remaining before expiration: 5.8 weeks
  • Position close goal/limit: I’m aiming for full profit and might willing to take the 200 share assignment and the profit on the long puts if we go the wrong direction.

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