While the markets were on a steady slide lower since the beginning of May I let my overall equity exposure slip away some. This was nice on the way down, but with what I see as limited downside remaining I’ve started to build my exposure up again with shorter dated options. I spent some time reviewing my asset allocation yesterday and saw my large cap exposure was less than 16% of my IB account. To remedy that, I turned to the ultra ETF for the S&P 500 ($SPX), SSO, to get as much “juice” out of the position as possible. Since I see the S&P 500 finishing the year higher than it started (close to current levels) I didn’t see much risk in selling a put close to the money. While SSO was trading at $51.37 I sold one SSO August $50 naked put at $2.05 and received $204.63 after commissions. I almost made this trade yesterday, but wanted to make sure nothing weird happened with the austerity vote in Greece this morning.
As expected the vote passed and we got a good rally off of the news. This always could’ve been a “sell the news” event, but so far it hasn’t panned out that way. Seeing pending new homes sales contracts coming in higher than expected helped too. Nike (NKE) came out with positive news on their earnings call a couple of days ago and we’ve seen other large companies continuing their bullish outlooks. All together I don’t see us falling off a cliff any time soon. That’s not to say that macroeconomic factors can’t hold the markets back from another major rally, but it should keep any downside in check. On the positive technical indicator side, the 10 day moving average for $SPX is moving above the 20 day moving average. This is a bullish indicator that I’ve seen work multiple times.
I was even tempted to aim for a higher strike with my trade, but since I still have two short SSO January $55 puts in place that give me a good bit of upside potential I chose limit my risk some and stay slightly out of the money. Even with being $1.37 out of the money I have a potential annualized return of 29.1% and can see SSO drop 6.64% before I take a loss. That’s not much more than 3% for $SPX to fall and not recover for me to avoid a loss, but after already being down more than 5% from its high the risk isn’t too bad for the reward if it works out.
I’ll keep adding more in the coming weeks if the news stays somewhat positive and the charts keep improving. I’m taking a vacation next week, although we aren’t going anywhere. I’ll keep my posts short for any trades I make to make sure I’m spending as much time as possible with my family.