Last year I had too much exposure to basic materials and it cost me when the sector collapsed. I’ve thinned that down some over the past month with good moves like dumping AA at $10 with covered calls. (AA is trading at $9.15 as I write this.) I sold covered calls on FCX too soon and I’m still sitting in the money on those, but not by more than what I took in from the calls I sold. The next three days will tell if that was a good play as it remains extremely volatile. Anyway, I started looking at some trades I made last year to see if any were back in a territory that might be worth reconsidering again now. XLB came to the top of that list. XLB is the ticker for Materials Select Sector SPDR ETF. I traded it successfully last year and then got out with the intention of waiting for it to come back down. It’s been easing down recently and yesterday around lunch time I entered a limit order to sell some naked puts where I saw support.
When XLB opened today at $22.19 I sold to open five XLB February 19 naked puts (XLBNS) for $0.50 each and received $236.25 after commissions. I was eyeing the 20 strike and even considered going out as far as March, but decided that’s too far out to have time value play much of a factor in today’s market. I’ll get a better annualized return using a shorter time horizon too. I decided against the 20 strike because the intraday low from November 20th was $18.81 and I expect that level to hold again if we see another sell off. Going for the lower strike gives me better downside protection and still offers a decent return. Dividing $9500 ($19 strike times 500 shares) by the $236.25 (the after commission premium I received) gives me a 2.48% return or around a 25% annualized return (5 1/2 weeks to go until expiration, 52 weeks in a year). Since I’m not actually keeping $9500 in cash in my account to handle a share assignment, my potential return is better than that.
This is a slightly different trade than I might have made last year because I’m going for the lower strike, smaller return, but higher probability that the shares won’t be assigned. If the chart doesn’t work out for me and XLB does fall much below $19, I expect the VIX will once again hit insane levels and I’ll be able to sell $19 strike covered calls pretty easily to finish the series of trades with a profit.
I think it’s smart to go a little farther out of the money in this market. I’ve been selling waaaaay out of the money lately. The bears and hedgers are making even those premiums pretty high. Good luck to you.
I have also adjusted my thinking lately to sell farther out of the money and/or further out in time, both on my Puts and my Covered Calls. After last year I feel much more comfortable making a smaller percentage on the option premium with a smaller chance of being assigned.