In my update yesterday, I said I was considering buying shares of SPY and placing a trailing stop limit to exit on a dip. After thinking of that plan a little longer, I decided that didn’t make a lot of sense because I don’t expect any drop in prices to be more than a few percentage points. In fact, I expect the melt higher to continue, at least until January. Any dip continues to be a buying opportunity, for now.
Based on this outlook, my two easiest choices were to either simply buy SPY and let it ride or sell an in-the-money put. I went with the latter. While SPY was trading at $181.09, I sold one SPY February $185 naked put for $6.74 and received $673.29 after paying $0.71 in commission. By selling a put, I gained a little more buffer before a loss than if I had bought the shares outright. By selling in-the-money, I have the opportunity to gain a little more if SPY continues to climb. I thought about selling January options, but wanted a slightly better premium. I didn’t want to go any farther out on the calendar because it would reduce my annualized gain and would slow my time value melt more than I like. I also expect a bigger sell off sometime in the first half of next year and want to be ready to readjust more easily.
SPY Naked Put Risk/Reward Breakdown
- Potential profit: $673.29
- Potential return: 3.78%, 15.6% annualized
- Breakeven price: $178.27
- Downside protection: 1.56% (Need 2.16% gain for full profit)
- Recent high: $181.24 hit today, about a minute after my trade hit
- Cushion from recent high: 1.64%
- Expected support: $180ish around the 10-day simple moving average (sma), then $178.00 just below the 20-sma where support held last week. I don’t expect SPY to fall below its support level from November around $175.00. This should be close to the 50-sma within another week or so.
- Position close goal/limit: I’ll roll it early for a good profit if I can, but might close it for an early loss if SPY breaks below $175 for more than a day.