I got caught wishing and wanting this morning.  Once the S&P 500 (SPX) started moving south a couple of weeks ago, I was counting on a little better correction than we saw.  I was wishing for a better dip because I wanted to load up even more on stocks.  I was wishing for a bigger jobs number, although I expected a smaller one today.  I wanted a better employment report to scare off the QE lovers and cause a good reason to buy the dip.  Instead, the report came out a little better than consensus and turned out to be enough to satiate both sides.  QE will probably stay in place, keeping easy money at hand longer than expected as of yesterday and the economy will still improve, albeit at a very slow pace.

In my eyes, this reduces the risk of a bear market starting any time soon.  I think we’re safe for this year and am not sure about 2014 yet, but think this slow improvement can last longer than a flood of new jobs hitting all at once.  The SPX reached a 5% correction intraday yesterday, but quickly reversed.  That’s the smallest range I thought we’d see and thought it would last more than 20 minutes.  The question quickly became, was that enough to reignite the bulls?  I waited through this morning’s data and then was even farther behind the trade than I was yesterday.

While SSO was trading at $79.98, I sold two SSO September $75 naked puts for $3.30 and received $659.09 after commission.  SSO hit a low of $78.90 this morning as I watched to see if it would rollover.  By the close of the day, SSO hit a high of $80.61.  In other words, I could’ve done better and I could’ve done worse.  I chose this strike after a lot of debate.  I knew I had to go out to September to get the premiums I wanted.  Since I don’t think the Fed will start tapering until later in the year, September should be relatively safe from scared selling that accompanies any such announcements.  Rumors could hit it earlier, just as we saw recently.  I don’t expect the rumors to take the market down more than 5-7% from recent highs.  That theory sent me out looking for at least a 7% cushion on SPX or 14% on SSO.  Once I priced the SSO options, I saw I could get a 15% annualized return with the $75 strike and that was all I needed.  Pushing for more than that while I’m already overextended would be far too risky for me.  It’s a solid potential return while giving me another 5% SPX cushion.

SSO Naked Put Risk/Reward Breakdown

  • Potential profit: $659.09
  • Potential return: 4.39%, 15.0% annualized
  • Breakeven price: $71.71
  • Downside protection: 10.34%
  • Recent high: $84.85
  • Cushion from recent high: 15.49%
  • Expected support: Above $75 (along the ascending trend line of higher lows starting in February), if not the June 6th low of $76.15 that happens to be in line with the trend line of higher lows that started in December 2012.
  • Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold.  Even if assigned, the downside risk shouldn’t be more than 5% from there.  If I can’t handle a 5% loss, I shouldn’t be investing in stocks.

I finished this week with $898.70 in net premiums received.  That’s good, but I wonder if I should’ve been even more aggressive.  I might have to close some exposure somewhere to give me more room to push the envelope elsewhere.  My T and EEM naked puts are costing me money right now.  They might get cut next week.  I might swap out my IWM naked put for a couple of UWM naked puts farther out-of-the-money.  I don’t know if the market is going to take off to new highs, but don’t expect major weakness either.  This is the time to sell out of the money puts in my opinion.