NaughtyPines

Opening* (Small Account): SPY July 23rd 393/398 SPV**

AMEX:SPY   SPDR S&P 500 ETF TRUST
... for a .54 credit.

Comments: While I'm waiting on various setups I've got hanging out there, I figured I'd start up a thread of sorts for a small account that is on the other end of the account-size spectrum from my IRA/retirement account posts: a small account I opened for a future grandkid or grandkids. There isn't much in it at the moment (around $2000), so naked short putting most instruments will be out of reach. Consequently, I'll have to use other tools in the tool kit. Here, to emulate dollar cost averaging into the broad market, I'm using a short put vertical in SPY and shooting to receive at least 10% of the width of the spread in credit, much as I've done with SPX 50-wides in my retirement account. These are just a smaller version of those.

Right out of the box, however, I ate up about 22% of the overall buying power in the account (($446/$2000) = 22.3%), so the other thing I won't be able to do here is put on a ton of trades in it; it'll basically accommodate around four 5-wides max at the moment, assuming I wanted to be super-aggressive with it and deploy all of the available buying power.

One thing you'll notice by looking at the metrics of the spread, however, is that I could consider just doing one of these at a time and potentially still beat long-term average broad market returns. Even at 50% max, the ROC is 1.27% as a function of net liquidity -- 10.3% annualized. Consequently, for those just starting out with 40 years to go until retirement, this is one thing to consider; how "big" you want to go in terms of total buying power deployed, particularly here where we're bumping up against all-time-highs in an implied volatility environment that is on the low end of its 52-week range (i.e., not the greatest time or "spot" in which to start selling bullish assumption premium in the broad market). Here, though, since any future grandkid is basically playing with "house money," I'll look to be a tad more aggressive than that on percentage of buying power deployed.

The metrics of this particular spread:

Max Profit: .54 ($54)
Max Loss/Buying Power Effect: 4.46 ($446)
ROC at Max: 12.1%
ROC at 50% Max: 6.1%
ROC at Max/50 Max as a function of Net Liquidity: 2.54%/1.27%
ROC at Max/50 Max as a function of Net Liquidity Annualized: 20.6%/10.3%

As with a lot of my trades, I'll look to take profit at 50% max and redeploy in the expiry nearest 45 days until expiry. On the take loss side, I'll look to take my lumps at 2 x credit received.

* -- This is a late post. The spread was opened on June 4th, and is currently worth .3750.

** -- Short Put Vertical.

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