I’m a few days early for spring-cleaning, but my trades today kind of felt that way. I had a few positions that just needed to be dumped. They weren’t doing much for me and I saw no reason to keep them. I also saw an opportunity with EEM triggered a trade for me. I’ve been thinking of some of these closing trades for the past week and finally found the time to sweep them away today. Part of that mind-set came from an article I read showing the historic Dow Jones performance after previous streaks of at least nine days, as the Dow matched again at yesterday’s close. Without trying to repeat the entire table, the summary is that the Dow has had as many as 13 positive days in a row and rarely sells off much in the following one-week, one-month or three-months after the steady rallies. Some outlying instances that showed bigger than usual losses and gains after the rally, but the averages was positive for each period reported. As much as I’ve been expected a step backward, I don’t think it’ll be severe and I still think we’ll see the broader markets finish up 10% for the year, if not much better.
I started with SPY. I had two long puts at $151 and thought I could get a little back from my hedge by dumping them now without taking on stupid downside risk. While SPY was trading at $156.53, I sold to close two SPY April $151 long puts for $0.77 each and received $153.22 after commission. SPY would have to close 4.02% lower for me to do better than this next month. That’s certainly possible, but it doesn’t mean it’s likely. Locking in the extra $156.53 made more sense for me today, especially since I’m not fully invested right now. That’s assuming my SPY puts for April $145 and $146 expire worthless. I might close them tomorrow. I almost did today. The immediate risk of a sudden fall greater than 7% is small and if I’m assigned around that level (if I don’t close the positions tomorrow), I’d probably do well to go long the shares and ride a rebound. Smart or not, I don’t considering them worth closing yet. I might regret not spending the $130 to close the four contracts. We’ll see.
IWM came next. I started to place this order yesterday and then delayed it until today. While IWM was trading at $94.19, I bought to close three March $94 puts for $0.29 each and paid $90.05 including $3.05 in commission. I had a chance to close these puts at $0.23-0.24, but used a trailing stop order instead of a market order. I set the trailing stop for a nickel off the best price so if IWM continued to climb, I’d cut my cost. Instead, within an hour, IWM came off of its morning highs, my order triggered and then IWM resumed its climb. I checked while writing this and saw the current bid/ask at $0.14/.015. Sometimes the trailing stops work great and sometimes they cost me a few extra dollars. The risk of a bigger sell-off starting this afternoon or tomorrow made me close the slightly out-of-the-money puts a day early. I still have three IWM March $91 puts in place and they’ll expire worthless tomorrow unless I luck out and get a trade for $0.02. Anything less and I won’t make a dollar.
After a quick review of my allocation post morning trades, I noticed that I still don’t have any international exposure and EEM looks like it just found support (or is in the middle of a dead-cat-bounce). While EEM was trading at $43.12, I sold three EEM June $43.50 puts for $1.52 each and received $454.83 after paying $1.17 in commission. EEM finished 2012 at $44.35. I think it’s going to move positive for 2013 and should be able to pull out a 5% gain, if not something closer to double digits. Rather than push my luck, I sold these puts only a little in-the-money. I decided to go out to June for the expiration to give myself some more time to have them work out. Of course, the longer contracts gave me a smaller potential annualized return (13.0%) and a slightly better cushion before a loss (2.63%) than the shorted dated contracts. If I can add the maximum gain of 3.6% by the middle of the year, I’ll have a great first half of 2013.
I probably didn’t need to make this final trade, but it was so cheap, even the small risk wasn’t worth the few bucks. While DIA was trading at $145.09, I bought to close two DIA March $142 puts for $0.03 each and paid $6.38 including $0.38 in commission. I still have two DIA March $138 long puts that will expire worthless tomorrow, unless I luck out on these too and can sell them for two cents each. In years past, I would’ve saved the $6.38, but I’ve been burned more than once and realized that spending a few bucks is better than getting surprised with an unexpected market reversal.
I need to get more in play soon. I’m far too under-invested for a market that continues to push higher. I still have that lingering fear that this spring will be like the past couple of years and we’ll see a mini-correction. The fact that the VIX is under 12 just adds to my fear of the unknown. Starting fairly soon, I’ll probably start selling out of the money puts to have something on the table, but at a much reduced risk (and return). The best case will be a drop in prices enough for me to take some assignments as the market recovers. If we get 5% cheaper, I might even switch to some leveraged ETFs like SSO or UWM again.