Dropped SPY Hedge & Exchanged AAPL for DIS Puts

I’ve been thinking about closing my SPY October $160/180 vertical put spread for more than a week.  SPY recovered nicely from its recent decline and I didn’t feel like it was giving me the protection I wanted.  With the long puts being nearly 10% out-of-the-money, I don’t think I was protecting much.  I don’t expect to see a correction of more than 10-12% before October expiration and decided it was better to drop my weak hedge and get a little money back before it was all gone.  While SPY was trading at $199.39, I bought my three SPY October $160 puts for $0.12 each and sold my three SPY October $180 puts for $0.48 each.  I received $103.26 net after paying $4.74 in commission for exiting the six contracts.

I briefly considered leaving my SPY October $160 puts in place.  They are nearly 20% out-of-the-money, but for $36 and commission, there was little reason to leave the risk of an extreme black swan event hitting.  I still left the trade with $103.26 more than I planned to exit with.  I paid $859.51 for the hedge in mid-May and finished with a net realized loss of $756.25.  While I never like losing any money, I’m still glad I made the trade.  It gave me plenty of comfort when stocks started heading south a few weeks ago.  I plan to make a similar trade at higher strikes again, but will wait for the right opportunity.  For now, I expect stocks to remain in their trend higher.

I sold a put on AAPL just over a month ago and the stock has gained more than $4.00 since then.  I could have sold a higher strike, but the potential return was good enough at the $92.50 strike.  Since the duration has been cut in half since I sold the put and the stock has gained 4.2%, the premiums have dropped substantially and I was able to take an early profit on my trade today.  While AAPL was trading at $100.57, I bought to close my one AAPL September $92.50 naked put for $0.39 and paid $39.61 including commission.  This gave me a realized gain of $197.89.

My first instinct was to roll the strike higher and farther out, but Apple has a tendency to run higher into product launches and then sell off.  This time could be different, but with an expected iPhone 6 launch next month and maybe an iWatch launch there’s not a lot of cause for me to  push it when there are other stocks to work with that don’t have a similar catalyst approaching.  I’m going to enter a limit order to hit if AAPL comes down some and will continue to monitor it for a better entry point.

Knowing that I am far under invested for my market outlook, I wanted to add more exposure.  My first consideration was to sell puts on SPY since I’m lacking any large cap allocation.  When I looked at the premiums and ran them through my spreadsheet, I saw they weren’t worth much and didn’t give me much cushion from a loss.  With the VIX back under 12, it’s hard to make an argument for selling SPY puts.  That logic helps explain why I bought my long SPY puts to close them above.

I looked at a few other ETFs, but quickly came back to DIS.  While DIS was trading at $90.38, I sold one DIS October $90 naked put for $1.91 and received $190.51 after commission.  DIS doesn’t give much more protection from a loss compared to SPY, but it’s trading at less than half the price and I think it has a better outlook than the broad S&P 500 Index.  The potential return is a little better too since the beta (1.32) is greater than that of SPY.  I opted to sell the expiration that is just under two months away because the annualized return was better than the November puts that are exactly three months out.  If I was more worried about the downside risk, I might have been willing to accept a lower annualized rate to get another 1% of protection, but since I plan to add to this order on weakness, I wanted the duration to be shorter.

DIS Naked Put Risk/Reward Breakdown

• Potential profit: $190.51
• Potential return: 2.16%, 13.55% annualized
• Breakeven price: $88.09
• Downside protection: 2.52%
• Recent high: $90.53, hit after my trade today
• Cushion from recent high: 2.69%
• Expected support: The 10-day moving average is at $88.74 and could provide temporary support.  The same goes for the 20-day moving average at $87.58.  More reliable support should come from the 50-day moving average at $86.11.  The 50-day hasn’t broken since May 16 and has been a floor a few times on dips.  The 100-day moving average at $83.64 has been rock solid since October 9, 2013 and acted as the last stop for support a few times since then.  With these lines ascending, I don’t think DIS will fall below $85 (where I expect the 100-day average to be within a couple of weeks).
• Position close goal/limit:  Not only would I be OK with taking an option assignment on this trade, I plan to add another naked put the next time DIS gets closer to its 50-day moving average.