I mentioned in my weekend index post yesterday that I was planning on adding some SPY (or DIA) exposure early this week. I didn’t waste much time debating it today. I watched SPY as it traded in a fairly small trading range for the first couple of hours this morning and placed a limit order for a naked put to go with my covered call already in place. After missing the second dip of the morning by a few cents I lowered my strike and while SPY was trading at $114.56 I sold one SPY November 112 naked put for $2.65 and received $264.29 after commissions. Since I coupled my order with one of my client’s orders for the same contract I was able to save a few cents on the commissions for both of us which is always nice, especially since we’ll each pay another $1 or so for changing the order.
For irony, within 10 minutes of me changing the limit order SPY fell deeper and my original order would’ve hit as would an order $0.05+ higher too. Oh well, I wasn’t patient enough today after being too patient on Friday. At some point I think you have to pick your trade and go with it and not worry about $5-10 and that’s what I did. I would’ve felt worse if I had missed the trade again than just leaving a few dollars on the table.
The main reason I went with this trade was because I didn’t want to risk seeing the market run away from me again without some skin in the game. I own 100 shares of SPY already, but since I was expecting resistance to hit around $113 I sold a covered call at $112. I added this naked put at the same strike and same expiration to turn it into a straddle. That means that either this new naked put or my earlier covered call will finish with a full profit. I think any correction we see for SPY over the next two months will be shallow and short lived, so even if the timing doesn’t work out for me to see this contract finish out of the money and I’m assigned another 100 shares I think SPY will snap back up fairly soon.
In addition, by taking in these new premiums I have now reduced my cost per share of my current 100 shares down to $97.76. That’s after originally buying my 100 shares at $117.00. That’s what I love about selling options, although SPY was trading at $117.06 when I sold the original naked puts and is down $2.50 from then I’m actually up $14.24. That’s a little better than a 12% gain in six months instead of a 2% loss. If all of my bad decisions worked this well I’d be up ~24% by the end of the year. That’s nothing to be pissed off about.
My next trades this week might come from MSFT and MDY. I’m still long 200 shares of MSFT and am considering selling a strangle on it or at least covered calls. I use MDY as a standard in a lot of my clients’ accounts and in my IRA, but haven’t used it for this taxable account ever. I don’t know why. I just noticed that today. I see it as a good ETF for mid-cap stocks, so I plan to put it to use for me soon too.