Updates on TLT, IWM, and MDY Options

Last week I mentioned I was in the process of starting over with my allocation. I’m moving slowly, but moving forward nonetheless. At the open, when TLT was trading at $121.15, my limit order hit and I bought to close 500 short shares of TLT for $121.15 and bought to close five TLT December $131 covered puts for $10.18 each. I paid $65,671.41 for the combination, including $6.41 in commission. I still have 500 TLT shares I’m short that are coupled with five TLT December $130 covered puts. The limit order I have in place to close those shares and options is still a few cents below the bid/ask. I’ll probably let it run into next week to see if it hits. If the order hasn’t hit yet, I will probably raise my limit to get out before the end of the month to avoid paying short dividend and interest again. I’d be happy to see TLT run back into the mid $120s so I could sell new naked calls (or a vertical call spread) out of the money.

Since stocks have rallied so much since the election, I decided the might be getting close to a short-term top. Small-caps have ripped higher to reach what I see as a long-term trend line of higher highs. From July to September, the small-cap index ETF, IWM, road along this trend line with only small setbacks before reaching it again. That could happen again and I will have left money on the table from my new trade, but I’ll have more money at that point and will have reduced my risk slightly. While IWM was trading at $130.69, I sold to open one IWM December $131 covered call for $2.26 and received $225.33 after paying $0.67 in commission. I sold the December contract for two reasons. First, I wanted to take the profit in 2016 from either the covered call and/or the shares themselves. I have enough realized losses in the books already that I might as well try to even it out a little while I can. The second reason was that the premiums were fairly rich, which meant I could get a good annualized return while selling out of the money.

I didn’t time my order well. IWM was only $0.08 from its low of the day and then recovered to finish at $131.60 by the close, with $0.20 of that gain coming in the final five minutes of the day. Even with my less than optimal timing, I’m happy with the trade for my allocation reshuffling purposes.

I didn’t stop with the first two trades of the day. While MDY was trading at $293.08, I sold to open one MDY December $290 covered call for $5.80 and received $579.75 after paying $0.25 in commission. As I did on my IWM option trade, I didn’t time this one well either. MDY was only $0.18 from its low of the day and ended the day at $294.70. However, I’m another step closer to being out of my long positions before the end of the year and starting over with a clean slate.

I decided to sell this covered call in the money because I think the rally is getting ahead of itself a bit and we should see a slight retracement, even if only to $285 or so. Such a drop would be a good exit point for me if I see support surfacing, especially with the quicker time decay with an option sold with less than four weeks before expiration. If MDY falls further, I will have saved nearly $600 more than I would’ve had if I didn’t make the trade. If MDY stays above $290, I’ll still gain $271.75 from where the ETF was when I made the trade. The further it trades in the money, the more comfortable I’ll become in making a new naked put trade out of the money.

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