I just noticed that I haven’t made a trade in this account in nearly a month, since the June option expiration Friday. I didn’t believe it when I saw it and actually ran another activity download into Quicken to make sure I didn’t miss a trade. I knew I didn’t have much I wanted to update coming into the month, especially with prices down, but was still surprised by the realization. Anyway, I remedied that lack of activity today with two trades.
I started with SPY from an order I placed yesterday. I thought stocks could rise a little more by Friday and priced my limit order to hit on further strength. I missed the peak when my order hit within the first two minutes of trading. While SPY was trading at $211.75, I bought to close my one SPY July $215 put for $3.25 and sold to open one SPY September $215 put for $6.15. The calendar spread sold for $2.90 and I received $287.81 after paying $2.19 in commission. Late in the afternoon, it looks like I could’ve earned an extra $15 on the trade. It’s not much, but it all adds up.
This SPY put was part of a bigger trade I made on April 23, nearly three months ago. SPY was trading at $211.60 at the time, $0.15 below than when my order hit today and I sold the July put for $699.27 after commission. Closing it today gave me a realized profit of $373.18. The other two parts of the SPY trade I made at the time were buying a long SPY March $215 put and selling short a March $195 put. I’m down on paper by about $62 on the March 2016 combo so far and expect to lose more on it as I make up for it with today’s trade and other bullish trades. I sold the March spread for $712.20 and cut into that with today’s realized gain by $373.18, leaving me with $2,000 of insurance for a cost of $339.02. If my September put turns into a full profit, I’ll be ahead of the game and will have six months to trade against SPY with a $20 cushion on each share. I had no fear about selling the September put in the money since I knew I had it hedged for a ~10% correction.
SPY Naked Put Risk/Reward Breakdown
- Potential profit: $613.90
- Potential return: 2.94%, 16.26% annualized
- Breakeven price: $208.86
- Downside protection: 1.36%
- Recent high: $213.78 on 5/20/15
- Cushion from recent high: 2.30%
- Expected support: I’d like to see today’s low of $211.58 hold support since SPY gapped up to it, but won’t be surprised if July 13 low of $208.94 gets retested. July 13 is when SPY gapped higher by nearly a dollar just a few days ago. The intraday low on July 7 at $204.12 is the big line I’m going to watch. Not only was it support last week when the market reversed course, but it is also almost 4% below today’s intraday high, which is within the normal range for the current bull market cycle’s mini-corrections.
- Position close goal/limit: As I covered in my writing above, this put is hedged with a March 2016 calendar spread. That hedge gives me room to avoid worrying about a true correction of 10% on SPY. I could see major buying coming back in when we finally get the 10% monkey off our backs. Then again, I don’t know what’s going to cause a 10% correction, so my opinion could change if we get an unexpected macro-event.
My FEZ trade didn’t have a hedge mixed into it, so it was simply a calendar spread with no other backing. I sold the new put in the money too, mainly because it is only on two puts and FEZ could outperform for another couple of weeks if events in Greece calm down with their latest Band-Aid. While FEZ was trading at $39.12, I bought to close my two FEZ July $40 puts for $0.97 each and sold to open two FEZ November $40 puts for $2.37 each. I received $276.83 after paying $3.17 in commission for the $1.40 calendar spread. I would like to have had a shorter time before expiration, but the September puts aren’t available yet. I have nearly $50,000 scheduled for September expiration already anyway between my MDY and SPY puts, so it might be good that I spread it out further down the calendar.
FEZ was trading at $40.38 when I sold the July naked puts, $1.26 higher than it was when I made my trade today. The cool part, like with my SPY put above, is I made money even though the underlying ETF lost money. I only had a realized gain of $112.83 on these FEZ July puts, but that’s a lot better than losing $252 plus commission if I had bought the shares outright. This has been a fantastic year to sell options and I’m going to continue to use the same strategy until it stops working.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $474.41
- Potential return: 6.28%, 17.83% annualized
- Breakeven price: $37.64
- Downside protection: 3.79%
- Recent high: $40.81 on 5/21/15
- Cushion from recent high: 7.77%
- Expected support: Today’s low was $39.03 and was right at the 50-day moving average as it gapped higher on the positive (not positive for Greeks) news. This low could be an area of potential support, but a retest down to the highs from earlier in the week, around $38.87 is likely too. The key support I’ll be watching closely is at $38.30, the low on July 10 when FEZ gapped higher by more than a dollar. The 20-day moving average is below that mark now, but has turned higher and could help provide support along with the 200-day moving average that is just above this area.
- Position close goal/limit: I’m using the same philosophy as I did when I sold the July puts I just closed out. I only sold two puts so I could take the assignment on weakness. I still don’t think Europe is about to fall off a cliff and want to hold onto the position on a dip that goes below my strike. FEZ had an intraday low of $35.13 last week and I admit to being a little nervous, but I didn’t panic and it worked out for me.