This is starting to be a trend. I called it yesterday, but didn’t make the trade until today. At the bottom of my blog post yesterday I pointed out that TLT was due to come off its recent lows. I was hoping for one more day lower before it popped and missed a better trade because I waited. Instead of crying over spilled milk, I went forward with the trade this morning even though I didn’t get as good of a premium as I would’ve gotten yesterday. The premiums are still decent enough to make the trade worthwhile, especially as a balance to my other positions. While TLT was trading at $119.36 I sold one TLT February $118 naked put for $2.21 and received $220.27 after commissions. If the trade works out for me and I hold it through expiration I stand to make 1.90% (17.7% annualized). I have a cushion of 2.99% before I take a loss on the position. I considered selling March puts originally and still have a limit order in place good through COB today that will expire without being triggered. Once I saw TLT gap up this morning I decided I should shorten the contract …
As I mentioned in my S&P 500 chart post this weekend I see a lot of potential for the markets to extend this rally further. I thought about adding more exposure yesterday and clearly should’ve, but waited until today just in case Alcoa (AA) messed with the markets from their earnings call after the markets closed yesterday. My focus was on DIA rather than SPY or any other index ETF since I already have small-cap exposure through UWM, mid-cap exposure through MDY and S&P 500 exposure (albeit equal weight) through RSP. While DIA was trading at $124.87 I sold one DIA February $124 naked put for $2.59 and received $258.73 after commissions.
I sold this put out-of-the-money for a couple of reasons. First, I’m now 130% invested if I include all of my options in play, even the ones very unlikely to be assigned two Fridays from now. Second, I didn’t need to take on additional risk with an expected return of 2.13% (19.1% annualized) if DIA stays flat or rises. I have a 2.77% cushion which isn’t much, but the contract has less than six weeks before it expires. The way the markets move, we could see …
This S&P 500 ($SPX) chart shows the past three months of daily prices after the index finished the week at 1,277.81 on Friday, January 6, 2012.
The S&P 500 is approaching resistance at its October 27th intraday high of 1,292.66 and volume will likely stay light until the large cap index can move past this key technical level. The bulls have the advantage going into this challenge based on several technical indicators. These indicators include a bullish chart pattern, bullish moving averages and momentum as seen through the Williams %R indicator.
SPX has two ascending triangles within this chart. The smaller one has a horizontal line around 1267 and an ascending trend line of higher lows that converged with it on Friday. Using this bullish pattern alone indicates a break out is due that should take the index another leg higher during the current rally. The larger ascending triangle started with the October 27th intraday high and has an ascending trend line of higher lows that is moving higher at a lower angle. These two lines still …
My little DSX position has been inching off the ground some in the past few days and that tempted me into letting it run a little longer to see if it might actually have legs again and recover closer to where I bought my shares. That’s different than my goal this year though. My plan isn’t to look at where I was and try to get back there; it’s to grow my account based on where the stock or ETF is trading now. Where it was doesn’t matter. What I can get out of it from here does matter.
While DSX was trading at $7.86 this morning I sold three DSX March $8 covered calls for $0.45 each and received $133.42 after commissions. That brought my cost per share down to $9.33, but more importantly I stand to make a return of 5.64% if DSX stays flat and 7.55% if the calls are exercised. That’s 27.14% and 36.34% annualized respectfully. Both of those would be a nice way to start the year. I could’ve gotten another 10 cents if I had waited until the afternoon, but I wasn’t willing to take the risk of DSX rolling over again. Also, I opted …
Before I woke up to see the futures looking so strong this morning I thought we had a decent chance of starting the year a few percentage points lower. This set me up to come into the year a little under-invested and I quickly remedied that this morning with a couple of index ETF naked puts. Pretty much every sector I looked at this morning looked like it was ready to ride the next wave higher so I just needed to look for some diversification for my trades. I don’t think this opening rally will last too long before the next bad news out of Europe reminds us why the market is trading at such a constrained multiple while economic data on this side of the pond continues to improve.
To reduce my time exposure I sold puts with January expirations. I’m going to try to make a quick profit and be ready to exit or at least write covered calls in the near term. While MDY (Mid-Cap ETF) was trading at $163.46 I sold one MDY January $160 naked put for $2.10 and received $209.71 after commissions. MDY was up about $4.00 for the day by the time I made …
My 2011 stock picks were pretty vanilla and the results were too, except for EET which sunk me the most. (See the results of our 2011 Stock Picking Competition at the bottom of this post.) My 2012 ETF and stock picks mix in some spice with a dash of vanilla left in there too. Of course for my investing style I’d rather sell options on each of these to juice up my returns somewhat and reduce my cost per share, but that’s not how this competition works. We each pick four stocks or ETFs and cannot make changes throughout the year. The blogger with the best return, including dividends, wins. This year I’m going to include my related option trades that would go along with my picks to illustrate how using options could’ve helped me. It’s moot for this competition, but still fun to track.
GLD - Closed 2011 at $151.99
Gold has been beaten down hard since its early September highs and probably has a little more downside risk to it. I’m not expecting this sell off …
December was a pretty good month for me and allowed me to salvage a mediocre year. I’m actually not upset with my 2011 performance considering I made a couple of stupid trades that cost me big and I still ended up coming close to the average of the indexes’ returns. However, the goal isn’t to tie the index returns. I could do that much more tax efficiently by using a diversified buy and hold technique. The goal is to beat the indexes enough to balance risk and taxes. My risk planning was set up perfectly, but my execution wasn’t. If I didn’t exit on the declines when the market fell more than 10% I would’ve been much better off, but it did and I did. That’s what cost me my gains. Had I not sold out of some of my positions when the markets bottomed I would’ve been set to beat all the indexes, but I did panic and cut risk at the wrong time. Other mistakes were small in comparison and other trades lost money, but I believe I planned correctly. They just didn’t go my way. I don’t expect every trade to be a winner, but I can …
I only had one option expire today (DIA, December 30, $121 strike) and it expired out of the money, worthless. Just as I expected, DIA rose some, but not enough that I should’ve bought the shares instead of selling the naked put. I made the trade at the beginning December when DIA was trading at $120.94. At the end of the last trading day of the year DIA was trading at $121.88. I could have sold the strike $1 higher and made some more money, but I made more than $200 more by writing the put instead of buying 100 shares of DIA so I can’t complain.
I planned to write another naked put to kick off the year and ride the market each month with options on either side, but the resistance that the Dow and S&P have both been up against recently needs to break to the higher side before I feel I should add more exposure. I might miss out on the first couple of percent of gains, but if the markets dip again like it looks like they might be prone to, then I will have played it the right way. I’m under …
I charted the Dow Jones Industrial Average ($INDU, $DJI, DJIA), after the markets closed on Friday, December 23, 2011, after the Dow closed for the week at 12,294.00.
The Dow lurched higher during the few days leading up to the Christmas holiday only to reach the area of previous resistance by the time the closing bell rang. Without this line of resistance having such a powerful track record, the other technical indicators would lead technicians to believe the index was ready to move higher still. Those other indicators such as trend lines and moving averages have proven to be false positives in the past few months. A move to new recent highs all hinges on breaking this resistance. (That’s kind of obvious, a move higher depends on stocks moving higher, but you know what I mean when you look at this chart.)
If resistance wasn’t looming like it is, we’d be able to rely on two trend lines of higher lows drawing in closer to the DJIA’s current levels. Typically that would mean support was nearby …
