I mentioned this morning that I’d probably start easing into some trades starting this afternoon. FDML was one of those I thought about. It found support yet again in the $17.45-17.50 range that has worked for it over the past month. I was tempted, but then found an article on Forbes.com touting it as one of the 10 stocks with a danger sign around its neck. I knew it was risky already based on what else I had read and knew that was a common thought based on the high premiums, so I decided to give it another day of watching. I rotated through some other charts and came across the $SPX chart. The S&P 500 touched its 50 day moving average (1,114) just after noon today and moved back up slightly. Instead of going big into SPY, I opted to risk less money for higher volatility and moved over to SSO. SSO is trading close at close to 1/3 the price of SPY, but is a “double” ETF which means it can still give me a beating, but I only have $3,525 at risk instead of over the $10,000+ I’d have had on the table if I used SPY.
In the last 10 minutes of the trading day, while SSO was trading at $38.38 I sold one SSO March 37 naked put (SOJOK) at $1.75 and received $174.25 after commissions. I only went with one out of the money option because I still expect the S&P 500 to fall deeper, but I didn’t want to miss out if the 50 day moving averages maintains support as it has for so many months now. Some of the sting is off the top of the markets with the S&P 500 down 3% from its intraday high. Selling this option out of the money gives me another 4% cushion for the S&P 500 to fall before I’m sitting on a losing trade. Getting that low would be a 7% dip from the intraday highs which is more than we’ve seen for a mini-correction in a while. If we get the correction I’ve been expecting (and pleading for) of at least 10% I’ll sell new naked puts at lower strikes and add to my position at lower costs. If the S&P 500 gets that low we’ll see a move even higher in the VIX even more than we’ve seen this week and I’ll be able to take in higher premiums for my new naked puts and potential covered calls.
In the majority of the dips since last the beginning of the summer of 2009 I didn’t add enough to my open positions. I’m trying not to do that again this time. That could be the exact reason the rest of you should wait. Maybe only suckers are opening positions on this dip. Interactive Broker’s margin rates are dirt cheap, so even if we get a 20% correction and I get in too deep too early and go on margin, I won’t be risking much in interest and should be able to make it up in premiums.
Can you tell I’ve decided to embrace risk again? Too bad I waited so long, but you never can get the spilled milk back in the cup just by complaining about it.