After April options expired this past weekend I’m left with little exposure in my account in either direction. I only have three positions where I have investments, two stocks and one ETF. That leaves me with a lot of cash ready to go to work. Here’s what I have in my account before the markets open on Monday:
- JOYG – $6,813 at risk, subtracting my covered calls value from the stock’s value
- XLB – $1500 at risk, I’m hedged, so the most I can lose is $3.00 x 500 options
- NDAQ – $9,150 at risk, subtracting the value of my naked puts from the strike price and quantity of options.
That brings my total money at risk to $17,463 and with my account value at $68,631.51 I am basically sitting on 74.56% in cash. I stand to miss a lot to the upside if this six week old rally can continue. I foresee a pullback coming sometime soon and once it starts it could build until we get a retest of an earlier technical level. I don’t know what level I’m aiming for yet, but know it’s lower than we are right now and will pick a target soon. In half of the articles out there today you can read that this is the biggest run in decades and while it could certainly go on longer the chances for a breather get stronger every week. In other words, I think the markets have a greater chance of going down in the near term than up.
Since my goal is to sell options into May expiration then I stand a good chance of having a better week than this one to buy into this market between now and May expiration. We have four weeks to go until May options expire and after six positive weeks in a row I expect a decent dip before we make it 10 weeks straight. Once that dip starts I expect the bears to be ready to pile it on re-shorting positions they’ve had to cover recently. If I’m wrong on my timing I don’t think it’s going to be by more than two weeks and I can wait longer if needed.
The XLB trade has been a very good one. We will see if the markets can turn around and end positive again today.
4/20/09 SSO=$22.25 SDS=$68.70
Here’s an example of what I like to do…
Sell 3 SOJQV @ $1.50 (SSO May $22 Put) = $450
Sell 1 SDSQP @ $4.55 (SDS May $68 Put) = $455
One will expire or be closed early. The other could be closed early, rolled or assigned. If assigned then sell covered calls. Once both are closed then repeat.
@ eToroFT – I’m still OTM on my XLB short puts, so I have some room for further decline still on it to leave me with full profit.
@ Mule65 – That’s an interesting move. What is the difference between just selling covered calls on SSO as the bearish play? Is it just the difference of not being forced short of SSO if the naked calls are assigned? The risk seems the same, assuming SSO doesn’t go up more than the equivalent full value of SDS going to 0. If SDS goes down the shares are assigned and you start selling covered calls on SDS do you also continue to sell puts on SSO? I guess that would put in a position where you could own both and are selling covered calls on both. Then you’re back to the same risk/reward as selling the original puts it seems.
It’s a way to collect two premiums where only one could possibly be assigned. If you let one get assigned then your cost basis is lowered significantly by the premiums. But, I prefer rolling to avoid any assignments. SSO and SDS are the most liquid “pair” which keeps their spreads tight. Lets re-visit the example on May 11th…
5/11/09 SSO=$25.73 SDS=$58.05
Buy 3 SOJQV @ $0.03 (SSO May $22 Put) = ($9)
Sell 3 SOJRY @ $1.70 (SSO Jun $25 Put) = $510
Buy 1 SDSQP @ $10.05 (SDS May $68 Put) = ($1,005)
Sell 2 SDSRG @ $5.15 (SDS Jun $59 Put) = $1,030
Why don’t you wait until closer to expiration? Are you trying to avoid an option assignment?
Am I reading it right, you lost $109 from the first options, but are rolling it to a higher amount now to try to make up for it?
Also, why did you sell SDS in the money and SSO out of the money? I appreciate the tuturial, please give us a couple more months of it so we can see how it can play out. I guess on some occasions it might end up close to the money at close for each and you could pocket a profit on both.
I’m waiting longer but prefer to avoid assignment — this is an example. I try to roll for net credits. This was a one-way month so I doubled up on SDS to get a net credit of $25 while lowering my strike to $59 to improve odds of expiring. Trying to make $450-500 per month while keeping costs down. I’ll update again but should do so on my own site.
Since your site is blocked to those not invited, what is the requirement to getting into your inner circle? You can email me directly if you prefer and I’ll remove this comment from here.