Panic! Desperation!  Premiums on Puts!  It’s always hard to catch a falling knife so I like to wear a glove when catching one so I’ve moved my strategy into selling ETF Naked Puts.

How and why would you want to sell naked puts?

When the market drops like it is doing now, people tend to panic and start selling their equities which drives equity prices down.  Some choose to buy insurance on their stocks to limit their losses so they buy Puts (the right to sell at a certain price) which means that put premiums go up on those puts and they become much more profitable.

So here’s a real example from one of my accounts I did earlier this week.   SSO (leveraged 2x S&P 500) was trading at $66.30 so I bought 200 shares and sold $67 Calls for about $2.00 to make $400.   This was a simple buy/write but I’d like to own more SSO just not at the $66.30 price so I moved to naked puts and…..

I sold 2 contracts on SSOSM (July $65 strikes) for $1.65 to rake in $320 on this trade.  If SSO stays below $65 then I’ll be forced to buy SSO at $65.00 no matter how low SSO goes.   If SSO stays above $65, then I get to keep the premium and preserve my cash.

Let’s look at this trade more closely, if I received $1.65 for SSOSM  AND I’m assigned (SSO < $65 on July 19th) then I’m really getting SSO at $63.35 ($65-$1.65 = $63.35).   So if SSO drops more, I’ll be owning 200 shares at a pre-determined price of $63.35 and I’ll be able to sell Calls at some point in the future (e.g. August,  September, December).

As of this post, SSO closed at $61.11 and if it stays here I’ll be forced to buy at $65 so why would I want to do this?   If SSO stays at $61.11 then I’ll own shares and be able to sell calls for August at $65 strikes which are currently trading at $2.70 and flip the direction.  I’ll be making money on the way down and on the way back up.

So the bottom line here is this:

  1. We’re using 2x leveraged ETF for the extra volatility
  2. We’re selling naked puts and covered calls to earn additional premiums and leverage dollar cost averaging by 2x.
  3. We’re looking for exceptional returns.

What are the risks?   The S&P can crash and SSO can drop to $20 in which case we’re all screwed no matter how or what you’re invested in during this time frame.