Sold MDY Feb Put Spreads

I’ve enjoyed 2013’s opening rally so much that I’ve just sat back and watched my account balance climb without adjusting much over the past three weeks.  I don’t have an exciting portfolio right now, but I don’t invest for excitement.  I invest to make money and that’s what I’ve been doing.  I came into this week with plans to buy puts for insurance after such a pop in stock prices, but we haven’t seen a real sign of weakness yet.  Today gave hints that it could be that day.  I still didn’t buy puts outright.

I looked over the naked puts I have in place already and they are all out of the money by 4-5%.  That’s about as much as I think any near-term correction might be.  So, instead of buying some insurance on these puts, I decided to let them run.  Because the majority of my account has a good cushion before I lose a penny, I’d actually like to see some profit taking within the indexes.  A drop of a few percent would give me a good lead over the indexes to start the year and more importantly, I wouldn’t lose any money at expiration.  UCO and QCOM are my two holdings that have more immediate downside possible, but I like both of them long-term and decided not to adjust them yet.  I could change my mind on UCO and buy a put spread, just in case sentiment shifts on oil.

I don’t have a bunch of upside left in my positions (outside of UCO) and don’t want to get reckless by adding in foolish trades after a 6% run higher in stocks in less than a month.  To give me something without risking much, I sold MDY put spreads.  While MDY was trading at $198.23, I sold two MDY February $200 puts for $2.94 each and bought two MDY $197 puts for $1.54 each.  I received $276.92 after paying $3.08 in commissions for the $3 spread.  I was planning to sell this spread for $1.35, based on the bid/ask of each put, but thought I should be patient with it and entered the order $0.05 higher.  It hit about an hour later for $1.40.

My mid-cap exposure was smaller than my allocations to both small-caps and large-cap stocks.  This trade changed that quickly.  I thought about going with EEM to get an international play in the mix, but it looks like it’s close to rolling over again.  I have trade triggers set to tell him if it moves much in either direction.  I might make a trade there still.  I also considered QQQ since I don’t have any weighting in tech.  AAPL did such a number on the NASDAQ today that it might be a good buy here.  However, I decided to give it another day first to see it right itself before I wade in.

Risk/Reward Breakdown:

  • Potential profit: $276.92
  • Money at risk: $323.08
  • Potential put spread return: 85.71%, 109.2% per month
  • Upside potential based on cash reserves (not that I have this cash in reserves): 0.71%, Annualized: 10.66%
  • Downside cushion: no cushion, need a gain of 0.21% to break even at $198.62
  • Downside risk based on value of underlying if assigned needed: 0.81%
  • Timing remaining before expiration: 3.4 weeks
  • Position close goal/limit: I’m aiming for full profit.  I’ll let it play out until the final week before the contracts expire.  If I think the downside is limited from there, I might take the assignment.  It would be 100% on margin if I do.  I have three weeks to decide how I’ll handle it.

The potential annualized gain on this trade is small.  I didn’t need to have a large gain since I’m not backing it with cash that I have available without using margin.  More importantly, I needed to make sure my downside was very limited.  I had to run a relatively tight margin to keep downside risk in check.  I’m just trying to pick up a few dollars while the market consolidates.  I’m still bullish on the year and this little put spread gives me room to make a quick profit if stocks keep moving higher.  If stocks drop, I’ll be positioned to come back in after a short lived sell-off.

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