Yesterday, I mentioned my waning concern on Syria’s influence on the US stock market over the coming months. News today proved that theory correct, kind of. Thanks to Russia’s announcement to intervene, the threat of our attack diminished and stocks advanced further. I was correct that stocks would advance, however I figured it would happen in spite of Syria. Instead, it happened partially because of Syria. I’m sticking to my belief that any change or failure of Russia to follow through will only cause a short-term drop in stock prices. Some of the advance in stocks could be left over from the positive data out of China the day before and the SPX moving staying above its 50-day simple moving average. Whatever the cause(s), stocks are up and I decided to ride the trend higher.
Less than 2 minutes into the trading day, while SSO was trading at $84.43, I sold two SSO December $80 naked puts for $3.50 each and received $698.83 after paying $1.17 in commission. I would like to have sold November expiration contracts, but they aren’t available yet and by going out two months further than the October expiration, I was able to create another 2.31% in barrier before a loss. I would’ve earned another 2% in annualized gains if it worked out for October. Since the December puts can give me more than a 15% annualized return, I didn’t want to worry about trying for a shorter-term trade.
I chose the $80 strike because even though I expect the trend to last for weeks to come and for any pullback to be shallow, I know I can be wrong. A reversal of any decent size can be painful with a leveraged ETF at play. By using the $80 strike, I still kept my potential annualized return over 15% and was able to give the trade a 9.39% safeguard before a loss. The translation to the S&P 500 is a buffer of a little more than 4.5% or down to around 1,600 for the index (and that doesn’t even factor in that SSO is still down ~3% from its high). If 1,600 breaks on the S&P 500, my losses will start to be double what they would be if I had not used a leveraged ETF. Still, at around a 19% correction, I’ll only be down 19% also (because I don’t lose a dime on the first half of that fall and then double up on the second half). A real bear market is a long shot to hit this year. That turns this trade into a decent probability of success for me. I forgot to look at the delta on the option when I made the trade, but think it was around -0.35. It’s -0.3341 nearly six hours and $0.10 later while I write this.
I’m not really afraid of an SSO assignment with a cost close to $76.50. As long as the ETF doesn’t slide far past my entry point, I should be able to sell some fat premium covered calls at the same original strike and hold on until the market recovers. More of what I’ll have to start thinking of soon is the fact that for the purpose of this journal, I’ll be removing $15-20k from this account right after the year ends to start 2014 with a $100k balance again. I don’t see ending 2013 with a $120k balance as such a far-fetched goal. That’s less than a 1% per month gain from here on.
SSO Naked Put Risk/Reward Breakdown
- Potential profit: $698.83
- Potential return: 4.37%, 15.3% annualized
- Breakeven price: $76.51
- Downside protection: 9.39%
- Recent high: $87.07 on 8/2/13 and 8/5/13
- Cushion from recent high: 12.13%
- Expected support: $79.00, but just like yesterday’s UWM trade, SSO has multiple moving averages (10, 20, 50, 100 sma) it’ll have to fall through before it even gets that low.
- Position close goal/limit: Plan to stick with it through expiration and I’m willing take assignment for longer-term hold coupled with covered calls.