As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert - (IWM)
Sell the iShares Russell 2000 Index ETF (IWM) December, 2012 $78 puts at $0.32 or best
expiration date: 12-21-2012
Portfolio weighting: take it down to zero and keep the (IWM) January, 2013 $76-$80 call spread
Number of Contracts = 24 contracts
Sell 24 X December, 2012 (IWM) $78 Puts at…$0.32
Don’t complain when you buy fire insurance and your house doesn’t burn down. That is what I tell traders who buy expensive downside protection during market meltdowns that later proves unnecessary.
That is the case with the December, 2012 (IWM) $78 Puts, which I used to limit losses to an existing iShares Russell 2000 Index ETF (IWM) January, 2013 $76-$80 in-the-money call spread position. While we are taking a hit here of -4.15% on the 12/$78 puts, it is more than offset by the +5.41% we have made back on the call spread.
The 12/$78 puts now expire in two weeks, or ten trading days. The upcoming weeks are traditionally the slowest of the year. Traders would rather party and Christmas shop than crash markets. This is the last trading day of the year for many investors, and you can almost hear volatility in the market collapsing.
With risk market continuing with a modest upside bias, the need to maintain downside protection is diminished. It looks like these puts are going to money heaven. It is best to recover what premium we can today, and sell them for $0.32 rather than running them down to zero. This will preserve 0.77% of this year’s performance.
I have to confess that I didn’t exactly shine with brilliance on this trade. I was expecting an Obama win to deliver a continued rally, not the 10% collapse that we got. As things stand, the (IWM) is now dead unchanged since we added the call spread on November 1. All that has increased is the volatility.
We should have made a bundle on this, but instead grabbed defeat from the jaws of victory. It has been one of those kinds of years.
On to the next trade.
Loss: $2.05 (average) - $0.32 = $1.73
($1.73 X 24 X 100) = $4,152, or 4.15% for the notional $100,000 portfolio
Seizing Defeat From the Jaws of Victory!