Yesterday I mentioned my plans to come in on either direction the jobs data pointed us. Although the details within the jobs data were mixed, the headline number helped push the scrum to the bulls’ side to start the day. Seeing the ECB showing more teeth in their snarl helped too. (The ECB is reported to be setting up a 100-200 euro loan to the IMF.) What I see more and more of is a reduced probability of another hard recession in the near term. While the troubles and concerns are very far from being resolved the majority of macro-economic fundamentals are looking more and more bullish (outside of China which is a whole other concern). This creates a little firmer floor for any dips, much like the one we’re still springing off of this week.
With all of this in mind I thought I should add in some large cap exposure. I’m deep enough into small caps already and have a decent amount of mid-cap exposure, so the Dow was the next logical place to look for me to diversify a little, not that diversity has done much for anyone lately in a market that seems to have a beta of one for every sector. While DIA was trading at $120.94 I sold one DIA December 30th $121 naked put for $3.05 and received $304.65 after commissions.
I sold at the money because I’m more bullish than bearish, but not so much that I considered going in the money for more than about 10 seconds. This trade sets me up for a potential gain of 2.6% or 31.9% annualized. I picked the short duration because I’m really banking on the Santa Claus rally to pull us through the end of the year with strength. By the time January rolls around we could be ready for another leg down briefly. I’d like to have this option window brief enough that the time value melts quicker and close enough to the money that the bid/ask spreads stay tight in case I want to exit. My plan is to take the assignment if it ends in the money and then try to work some tactical market timing trades on it with covered calls. I’m half hoping I get assigned the shares. With the 2.6% cushion I’ll gain back some of my lagging to the Dow’s return.
I’m really trying to make an effort to move away from the ultra ETFs somewhat compared to how I’ve used them the past few years. If the markets go back to a more “normal” flow of regular trending I might switch back, but the speed the markets plummet and then rocket higher make the ultra ETFs much less comfortable for a good night’s sleep. If we can see 3-4% changes in SPY and DIA in a single day I have no need to try to double that. The trick is just to be on the right side of the trade most of the time. I don’t even need to get it right every time. For example, if this DIA trade works for me five times in 2012 and I break even on the other seven attempts I’ll still have a 13% return for the year in addition to any dividends I catch along the way. I’d like to think I can do better than batting .417. If not, I’m in trouble.
Also worth mentioning – have y’all seen VXX lately? My December $33 naked put is only $0.46 in the red. I might enter a limit order to buy it back soon, but I’m still considering taking the assignment and then writing a covered put on the short shares. One bad story out of Europe could send it back to the moon though.