Bought a Put & Sold a Put

I’ve been getting more nervous about the chances of a bigger correction lately and after the close yesterday I started thinking that I should buy some puts on SSO, MVV and UWM.  I was looking at near term, out of the money puts and figured I could spend $300 and set up to make some money on a quick 5-8% dip.  Once I slept on that idea I decided to start with just one long put and see how the rest of the week goes before adding to it.  While SSO was trading at $51.81 I bought to open one SSO March $51 put for $1.25 and paid $125.71 with commissions.

SSO has had a couple of days recently where it dropped more than $1.00 and I don’t think we’ve seen the last of those days.  My long puts will be in the money if we get just one more day like this.  Two more of these days will move me to a paper profit.  As I mentioned in this past weekend’s $SPX chart I’ve been watching Williams %R and the 10/20 day moving average.  Williams %R delayed its recovery that it looked like it was going to make on Friday.  That made me think more bearish.  Today the 10 and 20 day moving averages are converging which sets up the bearish crossover unless we have a really quick rally.  Each of those indicators on their own is enough to remove my bullish view short term.  When both occur together I feel comfortable spending $125.71 for a little downside protection.  My biggest risk is that the correction might not come until after options expiration in two and a half weeks.  The 50 day moving average hasn’t broken yet and there’s another trend line of higher lows from mid-October that hasn’t broken yet.  They could both hold support and I’ll lose a little money for the piece of mind I just bought.

Back on February 18th I decided I was done chasing the rising market and decided to enter a limit order well above the bid on another January 2012 UWM put.  That ended up being the day of the recent high for UWM, but in the first dip last week nothing hit.  I forgot about the order by this week and just after I bought the SSO put above my limit order was triggered.  While UWM was trading at $45.03 I sold to open one UWM January 2012 $30 naked put for $3.50 and received $339.25 after commissions.  This trade was in my TD Ameritrade account that charges $10 more per trade in commissions.  This trade only gives me a potential 14.2% annualized gain, but UWM can lose 40.91% before I take a loss on it.  UWM can even lose 33.38% and I’ll still make a full profit.  I don’t mind being that deep on potential margin if the level for a loss is so far away.

Although that account was supposed to be where I passively kept my bond allocation I now have a decent collection of equity puts in it.  Along with my $16,965.45 in bonds I have a commitment to $17,000 worth of underlying ETFs if assigned.  The interesting part is that my account balance is only $16,560.72 with AMTD which means I’m 205% invested in that account.  That balances out my slight underinvestment in my IB account.  I don’t plan to sell any more puts in this AMTD account until I send more cash that way, but since I’m not in a rush to buy more bonds any time soon I’ll probably send my next few deposits to my IB account where I can trade much cheaper.  I’ll probably leave some more limit orders in place with IB to try to get in on some new dips.