Dropped SPY Hedge & Exchanged AAPL for DIS Puts

I’ve been thinking about closing my SPY October $160/180 vertical put spread for more than a week.  SPY recovered nicely from its recent decline and I didn’t feel like it was giving me the protection I wanted.  With the long puts being nearly 10% out-of-the-money, I don’t think I was protecting much.  I don’t expect to see a correction of more than 10-12% before October expiration and decided it was better to drop my weak hedge and get a little money back before it was all gone.  While SPY was trading at $199.39, I bought my three SPY October $160 puts for $0.12 each and sold my three SPY October $180 puts for $0.48 each.  I received $103.26 net after paying $4.74 in commission for exiting the six contracts.

I briefly considered leaving my SPY October $160 puts in place.  They are nearly 20% out-of-the-money, but for $36 and commission, there was little reason to leave the risk of an extreme black swan event hitting.  I still left the trade with $103.26 more than I planned to exit with.  I paid $859.51 for the hedge in mid-May and finished with a net realized loss of $756.25.  While I never like losing any money, I’m still glad I made the trade.  It gave me plenty of comfort when stocks started heading south a few weeks ago.  I plan to make a similar trade at higher strikes again, but will wait for the right opportunity.  For now, I expect stocks to remain in their trend higher.

I sold a put on AAPL just over a month ago and the stock has gained more than $4.00 since then.  I could have sold a higher strike, but the potential return was good enough at the $92.50 strike.  Since the duration has been cut in half since I sold the put and the stock has gained 4.2%, the premiums have dropped substantially and I was able to take an early profit on my trade today.  While AAPL was trading at $100.57, I bought to close my one AAPL September $92.50 naked put for $0.39 and paid $39.61 including commission.  This gave me a realized gain of $197.89.

My first instinct was to roll the strike higher and farther out, but Apple has a tendency to run higher into product launches and then sell off.  This time could be different, but with an expected iPhone 6 launch next month and maybe an iWatch launch there’s not a lot of cause for me to  push it when there are other stocks to work with that don’t have a similar catalyst approaching.  I’m going to enter a limit order to hit if AAPL comes down some and will continue to monitor it for a better entry point.

Knowing that I am far under invested for my market outlook, I wanted to add more exposure.  My first consideration was to sell puts on SPY since I’m lacking any large cap allocation.  When I looked at the premiums and ran them through my spreadsheet, I saw they weren’t worth much and didn’t give me much cushion from a loss.  With the VIX back under 12, it’s hard to make an argument for selling SPY puts.  That logic helps explain why I bought my long SPY puts to close them above.

I looked at a few other ETFs, but quickly came back to DIS.  While DIS was trading at $90.38, I sold one DIS October $90 naked put for $1.91 and received $190.51 after commission.  DIS doesn’t give much more protection from a loss compared to SPY, but it’s trading at less than half the price and I think it has a better outlook than the broad S&P 500 Index.  The potential return is a little better too since the beta (1.32) is greater than that of SPY.  I opted to sell the expiration that is just under two months away because the annualized return was better than the November puts that are exactly three months out.  If I was more worried about the downside risk, I might have been willing to accept a lower annualized rate to get another 1% of protection, but since I plan to add to this order on weakness, I wanted the duration to be shorter.

DIS Naked Put Risk/Reward Breakdown

  • Potential profit: $190.51
  • Potential return: 2.16%, 13.55% annualized
  • Breakeven price: $88.09
  • Downside protection: 2.52%
  • Recent high: $90.53, hit after my trade today
  • Cushion from recent high: 2.69%
  • Expected support: The 10-day moving average is at $88.74 and could provide temporary support.  The same goes for the 20-day moving average at $87.58.  More reliable support should come from the 50-day moving average at $86.11.  The 50-day hasn’t broken since May 16 and has been a floor a few times on dips.  The 100-day moving average at $83.64 has been rock solid since October 9, 2013 and acted as the last stop for support a few times since then.  With these lines ascending, I don’t think DIS will fall below $85 (where I expect the 100-day average to be within a couple of weeks).
  • Position close goal/limit:  Not only would I be OK with taking an option assignment on this trade, I plan to add another naked put the next time DIS gets closer to its 50-day moving average.

« « Options Expiration – August 2014 - | - Sold YHOO Vertical Put Spread » »

* If you like this post, then consider subscribing to the Full RSS feed or email updates.

DISCLAIMER: While I am a Registered Investment Advisor Representative, the information contained within this site does not constitue personalized investment advice. This material is meant as entertainment and is only a view into how I invest my own account, but not necessarily how you should invest your own funds. Trade using your own research at your own risk. This is impersonal investment advice which means the material written here, in email exchanges, on Twitter and/or other social networking sites do not purport to meet the objectives or needs of specific individuals or accounts.

Other Popular Articles:

- How to Read an Options Table

- Determining an Exit Price for a Stock

- Understanding Downside Risks in Investing

- How Naked Put Selling Works

- 10 Tips for Keeping Emotions out of Investing


  1. Comment by GZ

    Hi Alex, first of all- great job for keeping such a detailed and extensive journal, I discovered it not too long ago, and I enjoy reading it (so far).
    I agree on the notion that there is not enough juice in short SPY puts…
    Here is my suggested alternative for your short Disney ATM puts:
    Why not selling October OTM Yahoo puts? To keep the yield similar to yours, I would look at Oct $34 puts for $0.91, which translates to 2.68% potential profit and downside protection of 12.9% (Yahoo stock closed $38.01 last Friday). Technically, Yahoo looks safe- sitting well above 50 and 200 day moving averages. Fundamentally, it is a very cheap stock and could be a potential acquisition target for AAPL, FB, MSFT and even more for Alibaba or Softbank, due to the huge tax bill.
    Disclosure- I own YHOO in my Roth IRA and sold Sept $40 covered calls.

  2. Comment by Alex Fotopoulos

    GZ, Thanks for the suggestion. YHOO looks good for a vertical put spread ($33/36 or even $34/37)too. I might dip into it today or tomorrow.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.