It’s always an interesting day when we see stocks and bonds both moving lower. The day started off pretty boring. Not a lot was moving and so I placed some orders and went out to run some errands. When I got back, not much had changed, but within a couple of minutes, my orders started to hit as stocks slid.
My first trade of the day was on XOM. I wanted some oil exposure, but didn’t want to be stupid with it. I didn’t want to mess around with UCO or USO, so I went with a big energy company, Exxon Mobil (XOM). Since the price of oil start to fall last summer, I’ve stayed clear, but have been wondering when I should dip my toe in. XOM nearly made it up to $105 before the bottom fell out of oil. Over the past few months, XOM fell as low as $87 once and then close to $86 a couple of times. This price action makes $86 look like it could be a floor if there isn’t another huge cut in oil’s price. As XOM has bounced around over the past few months, it has made it back to $93 a handful of times after dips below $90. Based on this price movement, I thought I wouldn’t be risking much to sell an XOM naked put at $90.00. I saw that my annualized return would be around 27% and it made me rethink my logic.
Instead of selling a naked put, I could earn a decent return with a lot less risk by adding in a long put with my short put, so I ended up selling a vertical put spread. While XOM was trading at $88.37, I sold one XOM April $90 put for $3.17 and bought one XOM April $85 put for $1.22 and received $192.81 after paying $2.19 in commission. My annualized return is potentially more than 15%, but my downside risk is only 3.49%.
XOM Naked Put Risk/Reward Breakdown (ignoring the hedge for this part)
- Potential profit: $192.81
- Potential return (not including the hedge): 2.19%, 15.59% annualized
- Breakeven price: $88.07
- Downside protection: 0.34%
- Recent high: $97.15 on 11/21/14 (and not as recently $104.76 on 7/29/14)
- Cushion from recent high: 9.34% (15.93% from all-time high)
- Expected support: $86 should hold again. If it doesn’t, I have my hedge at $85 to protect me from anything ridiculous.
- Position close goal/limit: I’m going to try to let this position run through expiration since the dollar amount is relatively small. I set a trigger to alert me when XOM gets above $91.00 in case I want to watch for an early exit then.
About 15 minutes after my XOM order hit, my SSO order hit too. I don’t have much large cap exposure and wanted to add to it, but the S&P 500 has been rolling sideways for a couple of weeks and it could be ready for a little profit taking after the fantastic first half of February. I thought I might be safer to use a leveraged ETF and sell farther out of the money puts that allowed some wiggle room before a loss rather than use SPY. I already had one SSO March $115 put, but knew I could sell it cheaply if my new order hit. I didn’t bother entering a spread to make this order work because my March put was so far out of the money.
While SSO was trading at $134.62, I sold two SSO April $125 puts for $2.30 each and received $459.15 after paying $0.85 in commission. A few minutes later, I bought to close my one SSO March $115 naked put for $0.30 and paid $30.72 including commission. Along with doubling my exposure to the leveraged ETF, I increased my potential return from 4.01% to 13.07% annualized. I also cut my cushion from 15.14% to 9.22%.
I could see the S&P 500 falling a few percentage points on regular ebb and flow movements, but still don’t expect a true bear market to hit us in the near-term. If SPY (an S&P 500 ETF) falls 4.5%, I’ll make a full profit on my puts. If SPY falls 9%, I’ll be down 9% too. Although I won’t lose anything for the first 4.5%, I’ll lose double for the next 4.5%. While I don’t expect we’ll see a drop of more than 5%, I’m more confident any 10% correction will be bought and I’ll be happy to be in a leveraged ETF for the bounce back.
SSO Naked Put Risk/Reward Breakdown
- Potential profit: $459.15
- Potential return (not including the hedge): 1.84%, 13.08% annualized
- Breakeven price: $122.70
- Downside protection: 9.22%
- Recent high: $136.08 on 2/25/15 (not in love with this high just being yesterday)
- Cushion from recent high: 9.22%
- Expected support: 2014 ended the year at $128.31. I think 2015 will finish higher, but could see this mark retested. Before SSO can get there, it has to fall below its 10-day moving average that held support today at $134.07 and then its 20-day moving average at $130.12. My strike is close to the 100-day moving average and I expect strong support there. If I’m wrong again and SSO continues to slide, the 200-day moving average is just above $120 now and could provide final support at my breakeven price.
- Position close goal/limit: I’d like to hold this position to expiration, but if SSO can climb some more, I’ll be happy to exit with the majority of my profit again, like I did with the March put.
Speaking of closing early with the majority of my profit – It’s a shame I rolled my January $125 put to a lower strike, because the gain would’ve been even better. I’m glad I did though, because my SSO March $115 put never fell in the money while I was short and it allowed me not to panic. After selling that put for $553.27, I took a realized gain today of $522.55.
My fourth order to hit this afternoon was on DIS. I had a single naked put on DIS far out of the money and didn’t see the need to keep it alive while it was so cheap. While DIS was trading at $104.17, I bought to close one DIS March $95 put for $0.09 and paid $9.74 with commission. I received $231.27 for the put originally, so today’s purchase gave me a realized gain of $221.53 and opened up more cash for me to work with again.
I had a limit order for an MDY naked put in place, but canceled it after these other orders hit. I didn’t want to put that much cash into play on the same day in case something bad was starting. By the end of the day, stocks moved closer to breakeven and TLT fell nicely (1.37%) from its close yesterday above $130.00. If the futures look like TLT has more room to the downside tomorrow, I might change my limit order on my short shares.