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Adjusting When the Unexpected Happens:
Here is what I said about this idea last week – “This strategy is based on my observation that weekly put prices on SVXY are more expensive than weekly call prices, and they also seem to be higher than they should be given what the stock does most of the time. You can sell someone a weekly put that is $5 out of the money (i.e., $5 less than the current stock price) and collect more than a dollar ($100 per contract) for it. In other words, if the stock does anything other than fall over $6 in a week, you get to keep the entire option price you collected. SVXY has only fallen $6 in a single week once in 2014 (although in 2013, it fell considerably more on two occasions).
It is possible to sell puts naked (not in an IRA, however), but that would require a huge maintenance requirement that would reduce your return on investment. Besides, the risk would just be too great for most of us. Instead, I will buy a longer-term put at a strike about $6 below the strike of the call I plan to sell. That will create a maintenance requirement of $600 per trade (less the value of the put that is sold).
To start off, today with SVXY trading about $87, I placed the following spread order:
Buy to Open 1 SVXY Jan-15 75 put (SVXY150117P75)
Sell to Open 1 SVXY Aug-2 81 put (SVXY140808P81) for a debit of $7.20 (buying a diagonal)
The spread executed. I paid $8.70 for the Jan-15 75 put and received $1.50 for the Aug2-14 81 put that expires in 10 days. The spread cost me $720 plus a $2.50 commission. My total investment is $720 plus the $600 maintenance requirement, or $1320. That is the maximum I can lose if SVXY falls below $75 and stays there through next January. I can live with that unlikely possibility.
A week from Friday when the Aug2-14 81 put expires (most likely worthless), I will either buy it back for a small amount and sell a new put for the Aug-14 series that expires a week later (at a strike which is about $6 less than the then-current stock price) or do nothing and wait until Monday to sell a new put.
If the Aug2-14 81 put ends up in the money because SVXY has fallen below $81, I will buy it back and sell an Aug-14 81 put as a calendar spread, collecting a credit of some amount.”
With the stock falling by $15 in just over a week, the exact opposite of what we were hoping for took place. I love the challenge of making a gain on an options strategy even when the worst happens. This will be an opportunity to do just that.
Today, with the stock trading just about $72, I placed the following order:
Buy to Close 1 SVXY Aug-2 81 put (SVXY140808P81)
Sell to Open 1 SVXY Aug-14 76 put (SVXY140816P76) for a debit of $4.09.
It executed at that price. While I had to shell out $409 plus $2.50 commission for this trade, the maintenance requirement which was $600 last week (the difference between the 75 long strike and the 81 short strike) is now only $100 because there is only $1 difference between my long and short strikes now.
I selected the 76 strike for this trade because there was just over $1 time premium in that weekly put, and I am trying to collect that much each week as a minimum.
My experience tells me that when SVXY drops by a large amount like it did over the last two weeks, it recovers very quickly most of the time. I think there is a good chance that it might rise to over $76 next week so that the 76 put I sold will expire worthless.
My account balance is now $1338, which is $162 below the $1500 I started with. I still feel confident that I will achieve my goal of 3% a week using this strategy.
As soon as I make a trade next week, I will tell you about it. It is most likely to occur on Friday when I will probably buy back the expiring Aug-14 76 put and sell a replacement at some strike for the Aug4-14 series which expires a week later on August 22.
On another subject, have you got your free report entitled 12 Important Things Everyone with a 12 Important Things Everyone with a 401(K) or IRA Should Know (and Probably Doesn’t)? This report includes some of my recent learnings about popular retirement plans and how you can do better. Order it here. You just might learn something (and save thousands of dollars as well).
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I look forward to having you on board, and to prospering with you.
Terry
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