I must have been feeling a little giddy after charting the Dow Jones yesterday and thought it could be wise to get into the market early to ride the wave back to the upper side of the trading channel. Almost three minutes into the trading day, while SSO was trading at $51.85 I sold one August $53 naked put for $2.56 and received $255.27 after commissions. The market retreat began even before the disappointing ISM data was released, but the sell-off really caught wind once ISM came out and took stocks on a nose dive lower. Luckily this is not a typical trade for me – to sell in-the-money before the market has even traded for more than a few minutes. I’m glad I didn’t just buy the shares outright. At least I had a $1.40 cushion from the time I bought the shares.
I thought the debt ceiling agreement (even if it’s not a good solution) would calm the markets by removing an unknown factor and leave room for prices to rise. I didn’t foresee such a bad ISM number. I saw the data release on the calendar for 10:00 am today and knew it was a risk, but thought by selling in advance I might get a little better premium for something that probably wouldn’t do too much damage to the rally that was beginning early. So much for that theory.
My first instinct was to sell a naked put even deeper in-the-money on SSO, maybe at $54 or $55, but thought better at the very last minute. By selling the $53 strike put and having a cost per share (based solely on this trade) of $50.45 I believe I can work it into a profitable series of trades fairly easily. I went with the short timeline (only three weeks before it expires) to catch the pop this week and get out before the next wave of bad news (whatever it may be) hits by the end of the month. Even before I sold this put I was planning out my exit strategy if SSO didn’t go my way. If it looks like this contract will be assigned I’ll sell a covered call before August expiration to squeeze out a little extra time value from the call option. The strike I choose could even end up being below $53, just to make sure I end with a profit. If SSO stays close to where it is this afternoon, around the mid to upper $49 range, I’ll keep the strike at $53 and try to exit the shares at the same price I bought them, but pocket the premiums along the way. Depending on where SSO is trading in two and a half or three weeks I might sell another short dated option and go with the September expiration. More than likely I’ll stretch it out to December or January so I can pare it with the January puts I’m already short at $50 and $55 strikes.
SSO still doesn’t appear to be falling off a cliff completely. It is trading below its 200 day moving average which I don’t like, but $48 looks to be the true test of support before I worry too much. $47-48 marks the low range for SSO from March and June. I don’t see an overwhelming argument for that to change in August with companies still reporting strong earnings. Thursday’s initial jobless claims report will be big for the market if it stays under 400,000 again. That might be a catalyst to lift the markets again, but that’s three days away and a lot can happen before then. Friday’s jobs report is even bigger, so a lot can change in the very near term.