Today I entered my first trade in the account we're calling Tiny Tim. Tiny Tim is a new $6,000 account I'm trading and since it's the first new account I'm trading since starting this blog I'm using it to measure my performance. The starting date for the account is 2/13/09.
Today I sold one ERX March 20 put for $1.15 which after commissions resulted in a net deposit of $104.25 into the account. This put was written so far out of the money that the margin maintenance requirement is only $290. The return on margin (ROM) is 35.94% (104.25/290) for 32 days or 409.94% annual. We have downside protection to $18.96.
We've traded ERX a lot since the inception of this blog. I felt that today's panic was a buying opportunity and that oil and the overall market were near short term bottoms. If not, we don't get hurt on this trade until ERX drops another 33%. In this market anything is possible.
With Tiny Tim our first goal is to beat the S&P 500. Our second goal is a minimum 1 year return of 20%. We feel that this trade is the first step in that direction. Time will tell.
As of this writing our plan is to take 25% of premium received and putting it toward buying protective index puts. We just collected such a small amount, however, that we are going to wait until more premium is collected. With the 33% downside protection of this trade we do have a buffer. We might dig into the corpus to buy a protective put or two if the market were to rally and make the puts a bargain.
"Adjusted for Inflation, Dow's Gains Are Puny" WSJ
19 minutes ago
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9 comments:
G'morning! Eager to follow the progress of your Tiny Tim account. One question, you might remember I sold the Feb. 30 put on ERX. Clearly I have jumped in over my head as this sucker is tre volatile. I was hoping you could explain something to me. If ERX is a synthetic 3x of the Russell 1000 Energy index, which is trading around 200 if I recall, wouldn't a 10 point drop in the underlying index bring ERX to 0? If it point-for-point or a percentage correlation? Other question is when do the options get put to you, once suitably in the money? At this point it would be profitable for the option buyer to do so, but nothing yet. This is something I have wanted to know, but my success thus far in writing puts has prevented me from ever having the chance. So here's to experience! Thank you.
duke - ERX is getting a bid this morning. I can't remember what you got for your 30 put, however, that lowers your cost basis. If put to you then you can immediately sell the Mar 30 covered call. ERX is a trader and not a keeper so I doubt anyone will ask you to buy it before options expiration Friday.
I don't worry about ERX falling to zero but I'm not buying and holding it either.
If you look at your cost basis and add next month's covered call I think you're still in good shape. If the market tanks again it's not just ERX that is going to cause pain. Hopefully you have or will but some protective index puts...
Good luck. This market is something else, huh?
should read: Hopefully you have or will buy some protective index puts
Ooh, that's an interesting idea about selling the calls. So, help me through this, if you sold the call, and the price of the underlying rose, you'd gain on the stock but lose on the options. So what would be the optimal situation to unwind the whole ERX position? Also, I'm very curious about this, why on earth would the option buyer (of my puts) not exercise them and stick the stock to me if it was in the money, lower even than the strike minus the premium? It would seem they would be leaving money on the table. Thanks again for sharing your thoughts, I am ordering the Put Options book by Cohen that you recommend, and will read it soon. Cheers!
duke - he would put the stock to you so you could pay $30 for a $27 stock. Am I missing something? You sold the 30 put which means you promise to buy the stock for 30. You'd lower your basis by the amount of premium received and then after the stock is put to you, you'd write the 25, 30 or 35 depending on your situation.
TPC - I understand the responsibilities of selling a put option, but you said "ERX is a trader and not a keeper so I doubt anyone will ask you to buy it before options expiration Friday." So that is why I was curious as to why you thought they wouldn't put it to me. The other part I was wondering about was what the optimal exit strategy would be if I was to sell the calls after getting the stock put to me. Thank you for the time!
duke - ERX can rise like crazy in a heartbeat so I doubt early assignment. That's no guarantee just improbable.
I'm probably going to have ERX put to me and my strategy is to immediately write covered call to lower cost basis even more.
BTW ERX looks to be rising this a.m.
Okay, I am with you. I thought you were saying that it might not get put to me even if it was in the money, that made no sense. You are saying that it is likely it will bounce up before expiration. Gotcha. My broker, Interactive Brokers, claims they will assign the stock to the seller of a put if the equity price is even one cent below the strike price on expiration, so it will be interesting to find out soon if that is the case.
Now, I will say that this is a fantastic market to cut one's teeth in, if it doesn't cut it's teeth on you first! I would much rather be learning trading in a market as today's than in a bull market where buy-and-hold gets ingrained in your psyche and makes you grow complacent and lazy. I think that you will know inside of a year in you have the right moves to trade for a living these days. Personally, I've been working through the various markets for close to 20 years now, but only recently have made it my sole occupation. Options are a new arena for me, and I'm excited to have your blog as a resource. You aren't in the Central Florida area by chance, are you? Cheers!
duke - I'm in Austin, TX...the live music capital of the world :)
hopefully this blog will help us all share ideas and become better traders
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