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.
- 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.