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Ongoing Spread SVXY Strategy – Week 3:
In this simple portfolio, we own an SVXY Jan-15 90 put. We will use this as collateral for selling a put each week in the weekly series that expires a week later than the current short put that we sold a week ago. The decay of our long put (theta) is $4 (this means that if SVXY remains unchanged, the put will fall in value by $4 each day. The decay of our short put is $13 (and will increase every day until next Friday). This means that all other things being equal, we should gain $9 in portfolio value every day at the beginning of the week and about double that amount later in the week.
Each Friday we will have to make a decision as to which strike we should sell the following week’s put at. Our goal is two-fold – sell a put at a strike which is closest to being $1 in the money (i.e., the strike price is about $1 higher than the current price of the stock), and second, it must be sold at a credit so that we add cash to our portfolio each week.
This week, we were a little lucky because the stock is trading today at very near the strike of the 87 put we sold a week ago. We will buy this put back today and sell a put for next week at the 88 strike and collect cash in doing so. Here is the trade that we will place today. If it doesn’t execute after half an hour, we will reduce the credit amount by $.10 (and continue doing this each half hour until we get an execution).
Here is the trade we placed today:
Buy to Close 1 SVXY Aug5-14 86 put (SVXY140829P86)
Sell to Open 1 SVXY Sep1-14 86.5 put (SVXY140905P86.5) for a credit limit of $1.50 (selling a diagonal)
When we entered this order, the natural price (buying at the ask price and selling at the bid price) was $1.25 and the mid-point price was $1.55. We placed a limit order at $1.50, a number which was $.05 below the mid-point price. (It executed at $1.50).
Our goal is to generate some cash in our portfolio each week. This should be possible as long as the stock remains below $90 and we have to move that strike price higher. We will discuss what we need to do later when it becomes an issue.
We paid a commission of $2.50 for this trade, the special rate for Terry’s Tips customers at thinkorswim. The balance in our account is now $1670 which shows a $170 gain over the two weeks we have held the positions. This is much more than the $45 average weekly gain we are shooting for to make our goal of 3% a week.
Next Friday we will make another similar trade and I will keep you posted on what we do.
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
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I look forward to having you on board, and to prospering with you.
Terry
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