After I bought a March SSO put earlier this week the market turned to let me know my timing was less than ideal. I could’ve bought the put at half the price the following day, but decided to stay long with the idea that it’ll continue to add some protection to my other long positions for the next couple of weeks. This morning when the February employment data didn’t get much of a reaction (at first) I decided the risk wasn’t too great to add another short SSO put for a longer term play. While SSO was trading at $53.56 I sold one SSO January 2012 $50 naked put for $5.90 and received $589.54 after commissions.
I started off with a limit order at $6.30 and reduced it every few minutes until it hit at $5.90 which was about the same time the market started to loose its footing. Had I waited my original limit order would’ve hit within an hour or two. The good part is that I sold out-of-the-money (OTM) by a few bucks so I have that cushion on top of my premium. Based on the price of SSO when my order hit, I had a cushion of 17.65% before I take a loss on this trade. SSO can fall 3.47% and I’ll still take a full profit. With a potential return of 13.4% my potential annualized return is 15.0%. I’m pretty comfortable with all of that considering my belief remains steady with the idea that we’ll have a short, sharp correction (that’s where my long March put comes into play) followed by a nice resumption of the rally for at least a few more months from the upcoming dip.
If I was already 100% invested I’d probably be more timid with each new trade and wouldn’t sell so close-to-the-money. My next trade or two should put me back up to 100% invested again and then my strikes will start running farther OTM and might be less frequent also depending on how long this skipping along sideways lasts. If we get a good recovery above the current market levels I’ll try to keep selling $50-55 strike SSO options as long as the returns are somewhat decent. This is kind of the sweet spot area for SSO to me for 2011. After ending 2010 at $48.05, a 5% gain would be %50.45, a 10% gain would be $52.86 and a 15% gain would put SSO up to $55.26. While SSO attempts to double the daily return of the S&P 500 it tends to fail that goal over longer periods of time. If the index finishes 2011 with a 10% gain as I predicted two months ago then my $55 strike puts should finish OTM by a slight margin and any puts at lower strikes than that will just add more comfort to the end of the year.