I’ve been waiting for a good solid down day in the markets to add some extra exposure and used today’s dip to increase my holdings some. While I’m still underinvested overall, my use of some ultra ETFs makes up the difference for the most part in setting me up for a rest of the year to be in-line or better than the broad markets if we don’t finish with more than a 10% correction from here. A dip greater than that in the middle will only offer more buying opportunities if I can find the courage to buy when I think we’re close to a bottom, assuming we get much more of a dip at all. Because a bigger dip isn’t guaranteed I didn’t want to wait too long.
My first trade today was on EEM (iShares MSCI Emerging Index Fund). I entered a limit order a couple of days ago to catch a dip and apparently should’ve aimed higher than I did. In the first 30 minutes of the trading day, while EEM was trading at $46.49 I sold one EEM January 2012 $50 naked put for $6.70 and received $668.99 after commissions. That’s only four cents higher for EEM than it was when I made the same trade last month for 35 cents more. While I’m writing this post in the afternoon it looks like the same contract would sell for $7.45 now. That’s a decent amount for me to have left on the table. The good part is that I have 15.5% upside left if EEM can climb 7.55% from where it was when the trade hit. I have 6.85% of downside cushion before taking a loss. With my international exposure up to almost 9% now I don’t think I’ll be making another EEM trade for a couple of months at least, unless I see a great opportunity on a change in sentiment.
With large cap stocks lagging more in the past year when compared to small and mid-sized companies I’m expecting their downside risk to be smaller and their upside potential greater in 2011. That brought me back to SSO (ProShares Ultra S&P 500) again. While SSO was trading at $49.78 I sold one SSO September $45 naked put at $4.00 and received $399.31 after commissions. This brings my large cap ETF allocation up over 18% of my account balance. I can still stomach more than that and will continue to take small bites like this as the weeks and months roll on. This trade gives me 9.7% upside potential (15.3% annualized) and 17% of a cushion (that’s probably almost 8% downside for the S&P 500) before I take a loss. Since I sold this put out of the money SSO can lose almost 9% from here and I’ll still take a full profit.
This SSO put is my first September 2011 contract I’ve sold. I have other contracts expiring in February, June and January 2012. I’m also planning to add an MVV August put within the next couple of weeks too. I like to have varying maturity dates so I don’t catch every dip or top at the wrong time. I also didn’t see the right risk/reward for me today using the June and January expiries. Next week might be different again. Either way, I still don’t feel the need to take any more risk selling in-the-money on new options until we see a 10% or greater correction.