The almost always dependable Santa Claus rally hasn’t disappointed this year.  Traders have been gearing up for the end of the year, padding clients’ account balances and pushing stocks higher.  Part of that comes from the belief that politicians will actually do something worthwhile on the fiscal cliff this time.  Part comes from the usual December run higher.  Another chunk of it comes from the hopes of a bull market that continues through next year.  Barron’s 2013 outlook was pretty rosy, with most of the talking heads expecting the S&P 500 to finish 2013 above 1,500, some think we’ll be well above the round number.  Just getting close would mean this bull market has run longer than average bull markets.  That seems like a reasonable and predictable outcome, considering the preceding bear market was longer and deeper than the average.

It’s hard to argue against their case, unless Washington really screws up.  That’s quite possible and wouldn’t be the first time.  If Washington doesn’t get in the way, the EU might stay off the headlines for much of next year (don’t worry, they’ll be back) and China could pick-up on demand too.  If housing and employment continue to improve, 2013 could be an easy year to be a bull.

With all of that in mind, I rolled my SPY and MDY naked puts into next year.  While MDY was trading at $187.03, I sold one MDY March $188 naked put for $7.10 and received $710.02 after receiving a credit of two cents for commissions.  As I’ve mentioned in the past, some exchanges pay the trader for opening new option contracts and charge more for closing trades.  I lucked out and this was on the right exchange and was an opening trade.  Usually, it goes the other way.  I still have an MDY December $182 put that I’m short.  I tried buying it back for a nickel and then 10 cents, but canceled that order and changed it to a trailing stop.  I didn’t see the need to pay more than a dime for something that I don’t think has much of a chance of coming into play with only one more day to go, 2.68% out of the money, during a December rally.  To protect myself a little, I left an order in to close the position if the contract trades $0.20 more than its lowest trade.  If MDY gaps down, I could pay over $1, but doubt that’ll happen.  I could lose more, but am willing to take the risk.

Risk/Reward Breakdown:

  • Money at risk: $18,089.98
  • Profit potential: $710.02
  • Weeks to expiration from time of trade: 12.4
  • Potential return: 3.92%, 16.5% annualized
  • Cushion before a loss:3.27%
  • Break even price: $180.91

Later in the day, I changed my SPY order to go ahead and roll my December put, even though I had to pay a little more.  I opted not to “let this one ride” because it was too close to the money.  While SPY was trading at $144.74, I bought to close one SPY December $142 put for $0.14 and paid $14.69 including commissions.  At the same time, I sold to open one SPY February $144 naked put for $3.56 and received $355.30 after paying commissions.  By moving this out two months and up $2, I was able to increase my premiums received and still not take on too much risk.

Risk/Reward Breakdown:

  • Money at risk: $14,044.70
  • Profit potential: $355.30
  • Weeks to expiration from time of trade: 8.4
  • Potential return: 2.53%, 16.0% annualized
  • Cushion before a loss: 2.97%
  • Break even price: $140.45

I decided not to sell put spreads on these. I am comfortable with accepting some larger downside swings when I’m wrong about near term direction and as long as some of my portfolio is protected, I can try to make bigger gains.  The nice part of naked puts is that I get a bigger cushion before a loss than compared to put spreads.  A mix of both seems to be where I like to be.  I don’t think any retracement in the next few months will be more than 4-5%.  If that’s all that happens, I’ll be able to ride these out without much worry.  I might also be able to take some profits on my other long puts I’ve bought as part of my spreads.  If the market doesn’t correct any time soon, I’ll have some good gains to start the New Year.