Today gave us another boring day for stocks. At the open, it looked like we might see a bounce off of yesterday’s drop, but it didn’t take the bears long to overtake the bulls again (or at least bring get them in check). Most of the day traded around breakeven for the S&P 500 and within a few points on either side for industrials, mid-caps and small-caps. I figured this pause could simply be a break before a bigger descent and it was a good time for me to cut some low premium puts before they cost me more by expiration.
While DIS was trading at $76.29, I bought to close my two DIS January $67.50 puts for $0.06 each and paid $13.14 including $1.14 in commission. I don’t think there’s much of a chance at all that DIS will fall below $67.50 within the next two weeks, but for $0.06, there was little reason to leave the exposure in place. Now that I’ve cleared out this cheap option, I’m entering a limit order to try to sell new DIS puts on a dip. I expect DIS has a good bit of growth left in it, but it seems to have gotten ahead of itself recently and a short consolidation would be healthy for it. If it doesn’t correct, it’s probably too risky for my taste right now.
While IWM was trading at $114.29, I bought to close my three IWM January $110 puts for $0.32 each and paid $98.31 including $2.31 in commission. I debated this trade for a while. The low premiums only had a potential gain left of $0.29%. Over such a short time-frame, that is about 7.1% annualized. This low upside didn’t offer a solid reason to stay invested in the puts, even with them 4.03% out-of-the-money. I could see IWM falling another 4% in the next couple of weeks, but maybe not much more. If I stayed in these puts and took an assignment, I’d be in a good position to ride a bounce higher. I worked through the decision like this: If IWM stays flat or moves higher, I don’t miss out on much by closing the position. If IWM drops, I’ll be able to add exposure again while volatility is higher and some of the downside risk has already been lost. Together, that was enough of a reason for me to exit and not roll the puts yet.
Monday will be a more telling day. Christmas and New Year’s vacations will be over for most people and traders will be back at their desks. It’s hard to put too much weight on yesterday and today’s price action with volume being so light. Either way the market moves, I plan to make a trade or two early in the week. After clearing out the five option contracts above, I have more than $42,000 sitting in cash, not growing. Even a far out-of-the-money naked put is better than letting cash sit idle.
What are all of you expecting for 2014 and more specifically the next few months?