I grabbed my list of current holdings as of the markets’ close yesterday, 1/20/10. I haven’t made any new trades today, so this is what’s in my Interactive Brokers account right now. I still have 460 shares of the bond ETF, SHM, at $24.05 I hold in TD Ameritrade too.
Underlying Qty Expiration Strike Type Cost if Assigned
UCO 500 N/A $11.72 Long Shares $5,860.00 (as of yesterday’s close)
UCO -5 Feb ’10 $12.00 Covered Calls N/A
AXA -4 Feb ’10 $22.50 Naked Puts $9,000.00
CVS -2 Feb ’10 $33.00 Naked Puts $6,600.00
INTC -4 Feb ’10 $21.00 Naked Puts $8,400.00
NDAQ -3 Feb ’10 $20.00 Naked Puts $6,000.00
AFL -2 Mar ’10 $50.00 Naked Puts $10,000.00
EEM -2 Mar ’10 $41.00 Naked Puts $8,200.00
My balance at the end of the day yesterday was $91,348.00. If all of these puts are assigned and my long shares of UCO are not called away, my cost for my long shares (and current value of UCO shares) will be $54,060.00 not accounting for the premiums I’ve received. That puts me at the equivalent of being 59.18% invested before today started. This leaves $37,288.00 in cash to use to back future trades before any of my current options expire. If I make four more trades with an average underlying value of $9,322 I’ll be 100% invested if all of the new trades are assigned too. At that point we should be well into a correction and hopefully due to come back up soon after. If I still feel the same way at that point, I’ll keep selling new, out of the money naked puts and risk going on margin with any deeper correction. If we don’t actually get a full correction soon, most of these options will expire worthless and I’ll keep doing the same thing each month – writing new naked puts and covered calls.
I still don’t think any near-term correction will last too long and I have to admit I’m enjoying seeing the broader markets dip some this week as I’m still mostly under invested and the majority of my options are near the money still. That means I have more cushion for the underlying stocks to fall deeper before I’m sitting on a paper loss and I have plenty of cash available to get in deeper if we correct much more.
A few of the stocks I mentioned yesterday that I set up price triggers are starting to alert me. I haven’t entered any new orders on them yet, but will probably start setting myself up for some new trades today or tomorrow. Half of me wants to get in before we bottom with out of the money puts and the reasonable side wants to wait for the markets to flatten out. That’ll probably lead me to make some smaller trades as a compromise with both sides of my brain.
Hi Alex,
Using options to juice up returns is something I am looking to get into. However the market is overbought here even if sentiment is positive (a contrarian indicator), though that is changing also. Many indices are rolling over and the potential for a significant correction is real. So I am waiting with a lot of cash for a better environment.
My point is are you not taking on too much risk here for such limited gains? This is not a normal market environment.
Alex
Alex, I’m not sure what you’re asking. You said low risk, low gains. Did you mean to say I am taking on too much risk for the limited gains?
If the former, I’d agree – Lower risk for small, steady gains. If the latter, I think by selling out of the money puts I’m reducing my risk. The upside is limited, but if the market goes up I can make 2% or more each month. Throw in a few losing months and I should have a balanced out yearly gain of 15-20% with less risk than if I was only invested in index funds/ETFs.
– Alex Fotopoulos
Alex, yes I meant you are taking more risk for limited gains. I understand if your puts are assigned you will immediately sell calls to further lower your cost. But my point is that the market (Dow) may well correct a couple thousand points here or worse. So you may end up locked in to all or most of your assigned stocks as they are falling drastically. Especially bad since you sell puts that you can only cover half if all are assigned. Maybe you have a plan B in such cases I don’t know, I would like to hear it. You’re scaring me man!
Regards, Alex
It’s been a couple of years since I’ve only kept enough cash to cover half of my naked puts. I only do that when I’m very bullish, although I wish I had done that in 2009. If everything was assigned I’d still have about $23k available in cash (after my trade yesterday (2/2/10). That’s my plan B. Basically I look at my account as if I already owned these stocks, with the full downside risk accepted. I’m limiting my upside potential in dollars, but increasing my probability of making a profit each month by using options. Considering that I’m not quite 75% invested right now, it shows that I agree with you that there is some risk to the downside out there still. I had a 25+% gain last year while not being fully invested. That’s a clear example of how taking small profits monthly can increase returns and reduce risk.
I’ll go update My Trading Model page to reflect this change since my first year of blogging. I had forgotten that I had not done so yet. Thanks for catching it.
Alex, how did your strategy do last year during the crash to the March lows? How did you get through that? I assume that your 25% return includes a substantial loss into March and then you came back a lot to get to 25% overall?
As soon as we get to a more stable (sideways to bullish)environment I’m going to get into this.
I have a question for you. In my RRSP (retirment account)I can only buy calls and puts and do ‘covered writing’. I cannot sell naked puts or calls. I know I can write covered calls but is there a way to sell ‘covered puts’? (I cannot short in that account either). Thanks for your help.
Regards, Alex
If you look under the Category heading at the Account Summary section on the upper left sidebar you can stroll through to see each month’s update (and some other random account updates too). In February 2009 I was only about half invested and far ahead of the market, but stayed too underinvested for much of the recovery, so my year was more steady than the overall market. Since I had smaller losses up front I didn’t have to make up as much through the rest of the year.
They won’t let you short the stock, so you can’t do a covered put in a retirement account. Selling covered calls is the risk equivalent to selling naked puts, limited upside and full downside. I sell covered calls in my IRA instead of puts. You just can’t go on margin like in a taxable account.