See http://www.spyoptions.com for details.
Planning Ahead for the Week of October 5, 2009
First, the good news, which might push stocks higher:
1) Earnings. Yes, it’s earnings season already. Look for results from Alcoa, Mosaic, and Yum! Brands–among others–to potentially reassure investors that profitability is still in vogue and keep us from having to exit the put side of our LIC.
2) Oversold conditions. If you look at $NYMO (see right), we are heavily oversold, reaching levels (-80) not seen since late June and early September. In both cases, the market quickly rebounded, which will hopefully buy us enough time to maximize profitability for our LIC. Further, we’ve had a weekend for nerves to settle and have plenty of money coming in from 401(k)s and related ‘automated’ investments that needs to be put to work, given that the market is now 6% off highs from two weeks ago.
3) Historic strength of October. Contrary to the perceptions of many investors, October typically is a very bullish month and serves as the gateway to a six-month rally that lasts through April. Further, it has been the best performing month for the S&P 500 since 1993, excluding the aberration of 2008.
However, the market does roll over soon, I plan to buy/close the sold 100 and 99 puts at their respective market prices and ride the corresponding puts that I have purchased for as long as possible, should things continue to deteriorate.
To consolidate the Twitter-based updates from the past week, here’s where things currently stand:
A 100/98 put spread, originally priced at a net credit of $0.16 and now worth $0.43–a 15% loss. (22% of Oct. LIC)
A 100/97 put spread, originally priced at a net credit of $0.39 and now worth $0.58–a 7% loss. (17% of Oct. LIC)
A 99/97 put spread, originally priced at a net credit of $0.40 and now worth $0.34–a 4% profit. (9% of Oct. LIC)
A 113/110 call spread, originally priced at a net credit of $0.16 and now worth $0.10–a 4% profit. (29% fo Oct. LIC)
A 112/111 call spread, originally priced at a net credit of $0.29 and now worth $0.03–a 35% profit (23% of Oct. LIC)
That puts overall profitability for today at 1%, possibly 6% if SPY moves back to around 105. (This comes after cashing out the 116/113 call spread for a profit of 8% for the capital involved–or 2% of overall profitability.) Peak available profitability for this LIC stands at 20% on October 17, assuming we can remain between 100 and 110 by then. (22% total including the 2% already realized.) There is only a 2% chance of closing at or above 110 (outside the second deviation of probability), so the primary focus is on downside risk. Currently, a 23% probability remains that the market may close at or below 100, just within the standard deviation through this time period, which currently stands at 99.13.