Once the day moved along and pessimism stayed the prevailing mood of the day I started to wonder if it was getting overdone.  Bonds had rallied, but were not getting out of control yet.  I checked TBT (ultra inverse 20 year bond ETF) to see if there was a trade to be had with options on it.  The low for TBT on October 4th was 18.00.  I don’t think the yields are going to get any smaller than they were back then and if they do it won’t be by much, so naked puts on the inverse ETF started to look like a reasonable trade for a nice potential return.  While TBT was trading at $18.79 I sold five TBT December $18 naked puts for $0.52 each and received $256.38 after commissions.  I almost went out to the January expiration and also considered the $17 strike, but I wanted a short duration and a cost if assigned of only $17.49 seems not to be too risky for something I wouldn’t mind holding longer and selling out of the money covered calls on.  Eventually bond prices will go down again and I’ll be able to profit from the rise in TBT.  I think my chances are good I’ll profit in four weeks, but with a potential return of almost 3% in four weeks (more than 38% annualized) apparently many others think it’s a risky trade.  It’s not a full position for me, so the risk is somewhat limited in that respect too.

Soon after that order hit, my MVV trade hit too.  Unlike my SSO order that I just cut bait and ran from, I opted to sell covered calls on the ultra mid-cap ETF.  While MVV was trading at $50.88 I sold two MVV December $51 covered calls for $3.60 each and received $718.54 after commissions.  The potential return is great, but the upside risk of selling too low is high as is the downside risk of a bigger sell off.  Essentially it was a compromise after dumping SSO.  I wanted to keep some exposure and I don’t have a lot right now so this and TBT won out.  As with TBT, I wanted a short duration on the options.  It all builds towards my goal of starting the year with a clean slate.

I’m working on a new trading plan for next year that does not include selling LEAPS again.  I liked the idea in theory and it would’ve been great if the market didn’t sell off 20%, but it did and it messed me up.  I made better returns when I kept the durations shorter for my options.  In general, my plan is to focus mainly on SPY, MDY, IWM, UCO and maybe TLT.  I’ll keep working UCO similar to how I am already.  Aside from my lack of hedging my entry earlier this year, my UCO trade series tend to turn a nice profit.  For the indexes I’ll sell ITM naked puts to enter the position when I think the markets are bottoming and then I’ll stay long and uncovered while I think the markets are in rally mode.  When I see a turn lower coming I’ll sell either at the money or in the money covered calls.  The essence of the theory is that I’m not beating the indexes by trading individual stocks most of the time.  If my goal for my own account and some of my clients’ accounts is to beat indexes I need to invest in them more directly.  I’ll try to nibble an edge higher with options when my own market timing and the system I subscribe to predict changes coming.

Don’t get me wrong, I’ll still make trades on individual stocks like shorting NFLX when I see an opportunity, but for the most part I seem to better timing indexes than individual stocks.  Keeping my option durations short allows me to be more nimble with my trades and not get caught out with big bid/ask spreads like I have with my current ultra ETF longer dated options.  Earlier this year I was concerned about not having time to juggle trades each month or two.  By limiting my focus to only a few ETFs I should be able to group trades better and get more done with few trades.  I ran this type of model for one of my clients this year who wanted less volatility in her account.  So far her account is beating mine nicely, so I thought I should do the same for me that I did for her.  Hopefully it wasn’t a fluke and I’ll go back to my winning ways.

What has worked for some of you this year?  What do you see changing next year for your trading model (if anything) and what do you think of my potential changes?

While I was starting to write this post I kept seeing the $SPX move higher as if the sell-off was done.  I debated closing the single SSO covered call I have for a few minutes and saw $30-40 in time value vanish almost in between blinks.  Eventually I concluded I should remove some upside risk too in case we get a break out.  While SSO was trading at $43.07 I bought to close my one SSO October $42 covered call for $1.95 and paid $196.44 after commissions.  SSO made it a few cents higher before reversing course again.  I didn’t time either of these two trades great, but got out of both with a profit and a cleaner list of positions to manage.  Originally I received $199.65 for selling this call, so buying it back today gave me a net profit of $3.21.  These days I’m just happy to have a profit.  Since the option was $1.07 in the money I gave up $0.88 in time value that would’ve been more profit if I waited out next week (if we lived in a magical world and SSO stayed flat).

I’m still long 200 shares of SSO and now have no options on it for either side.  I’d like to leave it long to see if I can ride a good wave into the end of the year.  I might change my plans if earnings don’t start picking up after AA and JPM didn’t light up the night with great earnings news.  Rather than sell my shares or add an option as insurance to SSO, I might sell in the money puts on SDS or DXD for the front month to try to catch a quick trade.  With premiums so rich right now this might be a reasonable trade.  We’ll see.  I’m waiting for a better sell signal that today showed.

Speaking of JPM, I’m holding onto the JPM put I bought yesterday for another day, just in case.  So far I have a $285 paper profit on the puts since JPM dropped $1.60 today.  I’d love to see a bigger drop in JPM tomorrow morning so I could sell my puts for a bigger profit and then hold onto the shares for a bounce higher down the rode.

What do y’all think – are we heading back into the trading channel or are we going to see a break out?

After goofing my SDS trade last month I decided to take my short ETF trade a little slower this time.  In hind sight I should’ve stuck with my initial analysis and believed in my prediction that the S&P 500 was heading lower.  If I had more patience on the trade I wouldn’t have sold my SDS shares for a loss, but would’ve added to it on the suckers’ rally and then I’d be sitting on a paper profit right now.  Now that the SDS ship has sailed for me I moved to its little brother, SH.  SH is a short S&P 500 ETF, but not double like SDS.  Without using options I bought 150 shares of SH for $48.45 and paid $7,268.25 with commissions.  I planned to buy 300 shares, but added one of my client’s accounts to the trade and forgot to up the quantity, so we split the 300 shares.  Lucky for me since SH dropped soon after (I bought 3 cents from the high) and we started to take on a paper loss.  I’m still thinking of upping my position on it and will probably regret not doing it today.  I might sell a put or two in the money to try to protect myself from small gyrations and leave my new 150 shares to run if the SPX keeps dropping.

Before I had my short position in place I decided to cut some bigger exposure and get rid of some of my SSO puts that I have short positions in.  While SSO was trading at $34.51 I bought to close two SSO January $55 puts for $21.00 and paid $4,200.68 with commissions.  After I bought these puts and also after I opened my SH position I still thought I should take away more downside risk and while SSO was trading at $34.58 I bought to close one SSO January 50 put for 16.50 and paid $1,650.34 with commissions.

My biggest risk with these SSO trades is upside risk.  If the markets recover I expect the snap higher will be quick and I’ll miss the recovery rally.  I have been thinking that and fearful of missing profits for the past $15-20,000 lower in my account.  I should’ve done it then and don’t want to look back and wish I had done it even now.  The markets still look sick even though we had some good fundamental news come out yesterday.  Greece still rules the roost on market destroying news and that doesn’t seem to be on the verge of changing.  If anything, I might look back and think I should’ve exited even more of my positions.

For a bullish trade, I’m still considering an option spread on AAPL.  I’ve been thinking about it for a while and wanted to wait for a dip.  That dip is here, but I don’t know if I want to keep my cash on the sidelines a little longer.  At some point I feel like I should just wipe my slate clean and start over with less emotion and more trust in the charts (especially since fundamentals don’t seem to be helping lately).  The charts still say sell, so that’s what I did today.  Maybe I’ll give it another round tomorrow or the next day.

• SSO – September $45 Naked Put – I sold this put in late January when SSO was trading at $49.78.  This morning while it was trading at $43.94 I bought back my one SSO September $45 naked put for $1.15 and paid $115.34 with commissions.  Since I used an option instead of just going long 100 shares at the time, I made $283.97 rather than losing $584.00.  I’m not saying making less than $300 over nearly eight months is going to make me rich, but making money while the market falls sure does help the cause.
• VNQ – September $61 Put – Goes Ex-Dividend next week so I’ll collect a little more cash for holding it.  My cost will be $59.01 per share, so I’m down on it, but not by enough that I can’t be back to a paper profit with the sale of a covered call.  I’m waiting to see what the November premiums will be and then I’ll pick my strike.  There’s an outside chance I’ll end up selling December expiration calls if I decide to go further out of the money with the strike.
• DSX – September $11 Covered Call – I’m glad I only have 300 shares of DSX.  I’m down by close to $2.00 per share after subtracting the premiums I’ve received so far.  I’m going to wait until next week to sell new covered calls so I can see what the November premiums look like.  I might end up going as far out as December anyway, but waiting another day won’t work me much to see if I can do OK just two months out instead of three months away.

A few hours after buying my SSO September $45 naked put back I figured out how I wanted to continue with my SSO position.  I’m still short one SSO January $50 put and two January $55 puts, so I have plenty of room for upside movement should this week’s bounce turn into a bigger rally.  I have 100 shares long too, but I sold a covered call at the October $42 strike which is now in the money.  While SSO could easily fall back below this line, I think there’s a bias to move higher in the near term.  With that in mind, I sold one SSO October $42 naked put for $2.46 and received $245.35 after commissions.

This gives me a straddle on SSO at the October $42 strike which means one side is destined to “win” while the other “losses”.  Both legs cannot finish in the money, but SSO could finish close enough to $42 that I could close the side that is in the money and make a profit on both sides.  Just this trade alone stands to make 6.19% or 63.0% annualized.   SSO would have to fall 9.44% for me to take a loss on this trade.  That sounds big at first, but this week saw nearly 5% to the upside for the S&P 500, so a reversal would get me half way there quickly.  I still expect support to hold at the August low and if it does I’ll be somewhat safe on this new leg into SSO since I’ll be able to sell covered calls on it easily to keep me at a profit.

I started with a big move on UCO.  While UCO was trading at $33.76 this morning I sold three January $40 covered calls for $3.80 each and received $1,138.47 after commissions.  I was torn on this trade.  I still think oil will strengthen over time, but with the chances of the euro weakening and therefore the dollar strengthening oil prices might be pushed lower, especially if the economy doesn’t pick up and increase demand.  If we get a big bump from some government plan (whether it’s from Bernanke, the President or Congress) I’ll add more naked puts on UCO.  If the 300 shares I have long right now get called away at $40.00, it’ll be a gain of more than $6 in stock value and almost $4 in option value.  Together that’s a potential increase of around $3,000 in the next four months on the $10,128 I have invested in UCO.  I like 30% gains in less than four months.  If it’s not exercised, it’s still a return of 38.94%, not counting any price movement up or down in the underlying ETF.

A few hours later the markets started selling off again and fell below the morning lows.  As I mentioned in my SPX chart post yesterday, I still think support will hold and don’t want to sell my long positions down at these levels yet.  As an alternate approach I decided to sell one covered call on my 200 long SSO shares.  While SSO was trading at $38.64 I sold one October $42 covered call for $2.00 and received $199.65 after commissions.  This leaves half of my current long position open to run higher in a better bounce/rally off the lows and also allows me to reduce my average cost per share by a dollar on these 200 shares.  I also have four more naked puts on SSO spread between September $45 and January $50 and $55.  Once my September put is assigned I’ll probably go ahead and sell another covered call closer to the money on it and might even cover my other 100 shares and leave the other three naked puts short to keep a good bit of upside potential in my account.

Just a few minutes after my trade on SSO, the rumor hit the markets that China was going to aid Italy and buy some of their bonds.  This took the markets up sharply off their lows and showed how fickle this market is lately.  The rumor hasn’t surfaced to be anymore than a good story so far and might not matter in the end, but serves as a great reminder of what can happen when not-bad news hits the wires.

With the Fed meeting in a couple of weeks, the coiled spring could be set to unload.  If the Fed doesn’t do anything with a QE3 feel to it the malaise could continue for months.  There’s always the (very) slight chance Congress and the President will actually agree on something to help our country’s economy.  I think even a small agreement could lift stocks as it shows they are actually willing to talk to each other and compromise.  That said, even if we do everything right, all eyes are on Europe no matter what and I exited my UUP position too early.  At some point fundamentals might matter again and if we see companies doing OK on their upcoming earnings calls we could get a bounce for it.  A lot of the bad news is already priced into current stock prices.  While we’ll certainly get some downward revisions, the upside has more room to bounce than the downside does to fall.

These are the 11 options I was short going into the day.

• CSX – 1 August $25 put - Expiring in the money CSX rallied nicely for a few days from its lows, but then fell off a cliff again this week.  I like the stock long term and am going to take the assignment and not even sell covered calls yet.  I think it’s going to pull itself back up before long and when it’s closer to $25 (or at least closer to $24) I’m going to sell a covered call then.  It’s a solid company with good revenue and earnings, a forward P/E ratio of 10.38 and a dividend yield of 2.1%.  I’d be happier if the chart showed a better picture, but the downside looks like it might be limited to $20.00, the low from 8/8/11.
• DSX - 10 August $11 puts – Expiring in the money, DSX had a chance to work out for me if it stayed closer to the money, but it dropped sharply and I lost any chance of selling my long puts’ time value.  Since the underlying shares were so far below the strike (in the money) the intrinsic value took over the whole premium and left virtually no time value to sell.  I have a limit order in to sell my straddle for $0.00, just to get out, but I can’t find a taker yet.  I’m not at risk for more downside since I’m long 10 puts with the 1,000 shares I’m about to buy, but want to exit the position and be done.
• ITRI – 1 August $50 call - Expiring out of the money, ITRI has been a dog for me, so I sold my 100 ITRI shares for $35.30 and received $3,529.00 after commissions.  The series of trades cost me a realized loss of $1,423.44.  I only had $3,530 left to lose if ITRI went to $0 (which I don’t think it will), but I opted to cut my losses and move on to better opportunities that I understand better.  With the European troubles and US government debt issues ITRI’s prospects might not be as bright as they claim them to be.  Maybe they are, but I won’t be around to profit from it.
• JPM - 1 August $40 put – Expiring in the money, JPM hit $33.69 twice recently.  I expect that low to hold.  I’m staying long JPM for now with my 200 shares (including the 100 about to be assigned.  JPM has a forward P/E ratio of 6.25 and a dividend yield of 2.7%.  Assuming they don’t take too big of a hit in the near term to earnings I think JPM will be a strong long term hold.
• JPM - 1 August $41 call – Expiring worthless, see above
• QCOM – 1 August $52.50 put – Expiring in the money, QCOM hit a low of $46.70 recently.  I’m expecting that low to hold support and am staying long these new 100 shares without a covered call yet, but I’m considering a $52.50 strike covered call for October.  That would let me get out at the price where I’ll be buying and the premiums are worth pocketing.  My hesitation is due to my expectation QCOM will recover quickly and I can do better by waiting.
• SSO - 1 August $50 put - Expiring in the money, not only do I have this SSO naked put and the one listed just below, but also I have a September $45, January $50 and $55.  That leaves me in a situation where I don’t want to add more SSO exposure yet.  At the same time, I’m not really in such a bad hole that I can’t sell my way out of it with new covered calls.  Any new covered calls will have to be long dated and far out of the money, but with my puts expiring later I took in enough premium up front that I’m fine with my cost per share.  I want to see how the next couple of days trade and then maybe sell a couple of December $45 covered calls.  If we get a bounce in the S&P 500 I might make the calls September $45 strikes to go with my September $45 naked put.  That would force one side to finish in the money while the other expired with a full profit.
• SSO – 1 August $53 put - Expiring in the money, this put might go down as one of my worst timed trades ever.  I have a friend (another advisor here in Atlanta who runs a market timing service) who warned me against going long when I did, but I didn’t listen and am paying for it.   See above for more on my SSO plans.
• UCO – 1 August $34 put - Expiring in the money, I’ll sell a covered call at $34 on these 100 shares.  I’m not sure when I’ll get to it. The downside in oil really seems limited from here though.  I’m up to a half position in UCO so far and plan to sell new naked puts with any covered calls I sell.  I might even sell puts first.
• UCO – 1 August $43 put - Expiring in the money, see above.
• UCO – 1 August $47 call - Expiring out of the money, see above.

I thought the debt ceiling agreement (even if it’s not a good solution) would calm the markets by removing an unknown factor and leave room for prices to rise.  I didn’t foresee such a bad ISM number.  I saw the data release on the calendar for 10:00 am today and knew it was a risk, but thought by selling in advance I might get a little better premium for something that probably wouldn’t do too much damage to the rally that was beginning early.  So much for that theory.

My first instinct was to sell a naked put even deeper in-the-money on SSO, maybe at $54 or $55, but thought better at the very last minute.  By selling the $53 strike put and having a cost per share (based solely on this trade) of $50.45 I believe I can work it into a profitable series of trades fairly easily.  I went with the short timeline (only three weeks before it expires) to catch the pop this week and get out before the next wave of bad news (whatever it may be) hits by the end of the month.  Even before I sold this put I was planning out my exit strategy if SSO didn’t go my way.  If it looks like this contract will be assigned I’ll sell a covered call before August expiration to squeeze out a little extra time value from the call option.  The strike I choose could even end up being below $53, just to make sure I end with a profit.  If SSO stays close to where it is this afternoon, around the mid to upper $49 range, I’ll keep the strike at $53 and try to exit the shares at the same price I bought them, but pocket the premiums along the way.  Depending on where SSO is trading in two and a half or three weeks I might sell another short dated option and go with the September expiration.  More than likely I’ll stretch it out to December or January so I can pare it with the January puts I’m already short at $50 and $55 strikes.

SSO still doesn’t appear to be falling off a cliff completely.  It is trading below its 200 day moving average which I don’t like, but $48 looks to be the true test of support before I worry too much.  $47-48 marks the low range for SSO from March and June.  I don’t see an overwhelming argument for that to change in August with companies still reporting strong earnings.  Thursday’s initial jobless claims report will be big for the market if it stays under 400,000 again.  That might be a catalyst to lift the markets again, but that’s three days away and a lot can happen before then.  Friday’s jobs report is even bigger, so a lot can change in the very near term.

As expected the vote passed and we got a good rally off of the news.  This always could’ve been a “sell the news” event, but so far it hasn’t panned out that way.  Seeing pending new homes sales contracts coming in higher than expected helped too.  Nike (NKE) came out with positive news on their earnings call a couple of days ago and we’ve seen other large companies continuing their bullish outlooks.  All together I don’t see us falling off a cliff any time soon.  That’s not to say that macroeconomic factors can’t hold the markets back from another major rally, but it should keep any downside in check.  On the positive technical indicator side, the 10 day moving average for $SPX is moving above the 20 day moving average.  This is a bullish indicator that I’ve seen work multiple times.

I was even tempted to aim for a higher strike with my trade, but since I still have two short SSO January $55 puts in place that give me a good bit of upside potential I chose limit my risk some and stay slightly out of the money.  Even with being $1.37 out of the money I have a potential annualized return of 29.1% and can see SSO drop 6.64% before I take a loss.  That’s not much more than 3% for $SPX to fall and not recover for me to avoid a loss, but after already being down more than 5% from its high the risk isn’t too bad for the reward if it works out.

I’ll keep adding more in the coming weeks if the news stays somewhat positive and the charts keep improving.  I’m taking a vacation next week, although we aren’t going anywhere.  I’ll keep my posts short for any trades I make to make sure I’m spending as much time as possible with my family.

• DSX – Three June $12 naked puts – Expired in the money.  I’ll be assigned 300 shares on Monday at $12 and will be sitting on a paper loss, even after deducting the put premiums.  I’m waiting until Monday to make my final decision on what to do with DSX.  I’ve thought about cutting my losses and jumping ship, but I have so little at stake the risk isn’t too great if I hold on.  The question becomes if I should add more exposure.  I don’t think DSX’s ship is sinking yet.  (Sorry, blatant cliche.)  They’re still making money in this interesting economy and I expect them to gain or at least flatten out again once the economy finds stable footing again.  With a sizable wad of cash on hand (I could’ve said boatload, but that’s going overboard), DSX isn’t going bankrupt any time soon.  Adding more puts along with covered calls would bring me back to a paper profit and set me up for a nice gain.  I want to see the August premiums before I make a trade though.  If they aren’t good enough I might be forced to go out as far as September with my option straddle.
• VXX – Two June $35 calls and two June $70 calls – both expired worthless.  I exercised my two long VXX puts yesterday which triggered the sale of my shares at $50.  I’m done with VXX for at least 30 days, maybe longer.
• JPM – One June $46 covered call expired worthless.  I’ll hold onto my 100 shares and am giving it another try.  JPM is yielding 2.50% and is beaten down on fear right now.  Those fears of what changes are going to hit banking could become a reality, but it appears a lot of that is baked into the price now.  JPM trades close to historic low P/E range near nine on trailing earnings and its forward P/E ratio is at 7.20.  That’s cheap for a money maker and should provide good support soon.  I’m not certain JPM will rally soon, but do think any more downside price action will not last for too long.  With that in mind I decided to sell an option strangle with a tight range.  While JPM was trading at $40.80 I sold one JPM August $41 covered call for $1.70 and one JPM August $40 naked put for $1.67 and received $335.38 after commissions.
• UCO – One June $54 naked put – finished deep in the money and will be assigned.  I’ll own 100 shares on Monday and still have a UCO July $42 naked put in place.  I knew better than to open this position while oil was so high without putting a hedge in place, but I just didn’t do it.  Once I saw oil starting to roll over I knew better than to stay long without adding insurance, but I just didn’t do it.  Now that I’m about to own 100 shares of UCO at close to an $11 paper loss I decided to change my approach a bit.  I might regret this trade since it’s not my original plan, but I wasn’t planning for UCO to fall this fast either and I’m adjusting.  While UCO was trading at $40.35 I sold one July $42 covered call for $2.00 and received $199.53 after commissions.  This turns July $42 into an option straddle for me since I already have a July $42 naked put in place.  I’m actually hoping oil doesn’t recover in the next four weeks.  For one, it’ll help our economy having cheaper fuel.  Also, I’ll be forced to buy 100 shares of UCO again, but this time at $42 and my average cost per share will plummet.  I don’t want oil to tank in reference to this position, but if it does I’ll be long 200 shares (not quite a full position for me) and will then start adding more exposure through naked puts at much cheaper levels.  If UCO climbs I’ll exit the position with a $500+ lesson re-learned.
• ITRI – One June $55 Covered Call – Like JPM, ITRI is trading near its historical P/E ratio low range.  The trouble is that the smart meter leader has lost its mojo in Wall Street’s eyes.  I think it will recover based on valuation soon, but I decided not to risk waiting without reducing my cost per share a little bit more.  While at $47.68 I sold one August $50 covered call for $1.45 and received $144.23 after commissions.  This brings my average cost per share under $50 and leaves room for a nice annualized return from today’s prices if it is assigned in nine weeks.  I’m not confident in ITRI enough to sell another put yet, but am thinking about it since I only own 100 shares so far and the premiums are pretty good.
• SSO – One June $50 naked put – I bought it back yesterday just in case the decline in the markets didn’t change direction today.  I could’ve done better by waiting another day, but it would’ve taken some timing the way the markets sold off as the day progressed.