As expected, stocks rose this morning and then faded. I expected the fade to come later in the day or maybe even tomorrow. When I saw sellers coming in to take over the bulls’ fun, I decided it was time to take some profits and start setting up my end of the year payout.
I started with SPY. While SPY was trading at $200.30, I bought to close one SPY March 2016 $195 naked put for $5.69 and paid $570.09 including $1.09 in commission. This was the put I sold in April as part of a vertical spread. I took the profit on the long put in September after stocks bottomed in late August and held onto this put with the belief that stocks’ worst days were over.
I’m not convinced the next few months will be easy for bulls, so I thought it was worth taking a realized gain of $259.80 while I still had it. Even though this gain was smaller than it would’ve been a few days ago, it’s definitely good to have profited on both legs of my vertical put spread. If I think the mood on the market has changed, I’ll sell a new naked put, but I’m not sure I’ll use SPY on my next trade considering my tepid outlook for the broad market. I’ll also make the duration shorter than March expiration.
I moved my focus to IWM next and while IWM was trading at $111.55, I bought to close three IWM January $119 covered calls for $0.10 and paid $31.27 including $1.27 in commission. This trade gave me a realized gain of $549.45. I held onto my 300 shares of IWM and will re-write new covered calls at a lower strike on any bounce that seems to find resistance.
I’m not sure which direction IWM will move next and because of that uncertainty, I decided to close my IWM naked puts too. While IWM was trading at $111.54, I bought to close two IWM January $110 naked puts for $1.93 each and paid $387.58 including $1.58 in commission. I earned a realized gain of $599.19 by closing this position today.
These IWM puts were originally part of a vertical put spread that I sold in March. I took a realized gain on the long puts in September, the day after I sold the SPY hedge mentioned above. Like the SPY put spread, it is a great feeling to profit on both legs of the spread, even if it was months apart.
Maybe I could’ve waited to close all of these options in January, but I think (hope) my income will be higher next year and I wanted to have the gains fall into this year instead of next year. Even more than that, I am nervous about bigger downside moves in the market. I was far over-invested and needed to pull back on the reigns while traders are jittery. Based on my current account value, I’m 81.8% invested, but will be withdrawing a 10-15% of my account to bring my beginning of the year balance down to $100,000. Today’s trades set me up to do that without being on margin. I have shares of IWM, SPY and MDY that don’t have covered calls on them now and might sell new covered calls on these shares before the end of the year to lock in some gains going into 2016.
Stocks recovered some soon after I made these trades and I could’ve done better on the prices 30 minutes later, but it’s hard for me to be upset on a day that I took in over $1,400 in realized gains.