I realized last week that I was beyond fully invested and didn’t have a lot of upside left in my positions.  Technically, I still have almost $50k in cash, but that could be used quickly if my naked puts were assigned.  That led me to take profits on a handful of positions early in the week and consider my choices.  I could wait for the next dip and buy in then; I could buy in at the current prices; or I could set some limit orders that would hit on a little dip.  I chose the third route.  I entered a limit order for a new SPY naked put out of the money.  That order hit within the first couple of minutes of trading today.  While SPY was trading at $146.27, I sold one SPY March $143 naked put for $2.40 and received $239.23 after deducting commissions.

This trade brings me back over the fully invested threshold again, but with some cushion before it becomes a loss.  That was my goal.  I wanted to leave the limit order in place to hit on any random intraday dip without having to reconsider my decision.  I didn’t have to chase this order since I already have enough exposure in place.  I was in the catbird seat where I could wait for the trade to come to me.  That gave me the best possible execution without having to watch every tick of the ETF.  As a stroke of luck (or as I like to call it, genius), my order hit only $0.07 above the low of the day, giving me the high trade of the day on this contract.  I need more orders like this, where patience pays off.

SPY can fall 3.87% before it hits my break-even point.  That’s more than 4% where it was trading when I entered the order.  If SPY stays above my strike (I have a 2.24% cushion), I’ll have a 1.70% return or 10.1% annualized.  However, I don’t have the cash available to buy these shares if assigned.  I’d actually have to go on margin, assuming my other positions were assigned too.

I’m willing to take smaller gains like this if they are out of the money strikes.  If I could average 10% per trade and I have a buffer of nearly 4%, I’ll do fine over a full year as long as I over-extend my reach by a little.  That 4% buffer-rule would pay off better if volatility was higher.  It’ll come back and it’s not wise for me to push the limits too much until then.  Still, when we’re this close to the beginning of a year that should be positive (based on the history of the January effect), the chance of a major sell-off isn’t too great.  That theory ignores what could come out of Washington before the debt ceiling and sequestration is dealt with.  That’s the biggest known risk.  Oh, and earnings could disappoint too.

SPY finished 2012 at $142.44.  If I’m assigned the 100 shares from this put, my cost will be below this year’s starting point.  That makes this a lower risk trade in my view since I expect 2013 to be a positive year.  It would almost be a positive be assigned another 100 shares on a dip.  Even with all of the macro-economic factors weighed in, I don’t see more than a 5% mini-correction hitting the market.  If that happens, I’ll be situated perfectly to buy and sell covered calls while I take in the dividends.

The low trade for the year-to-date on SPY is $144.74.  I think we’ll see support there.  The 20 day moving average is just below there, so that’s going to be the added muscle of support if needed.  The 100 day moving average is barely below my strike and the 200 day moving average is only a dollar below my cost per share if assigned.  All are ascending and all could offer a reason for the S&P 500 to stop descending if it starts to correct.