NOTE: I don't like any of the strategies outlined below; this is just thinking aloud.
Today I'm looking at selling naked puts on SPY in my IRA.
Selling a front-month at-the-money (Mar $211.5) put brings in $260 in premium, but 'costs' $21,150 in buying power. The problem is, I don't want to tie up that much money.
I have had success with using a long out-of-the-money LEAPS put to partially secure selling front-month options. I can often put on a long 1-year diagonal put spread for a small credit, while reducing the margin requirement 'hit' to my buying power to maybe 10% of the short strike.
So what's that look like in SPY?
- sto -1 Mar'15 $210 put for $ 90 credit
- bto +1 Jan'16 $195 put for $780 debit
I can put on a +1 Jan'16 $195 / -1 Mar $210 put spread for a debit of $590. That is not a small credit, that is a big debit! Plus the $1,500 difference between the long and short strikes makes -$2,090 buying power. If I expected SPY to stay around $2100 I could roll the short $210 put out regularly for 10 months or 43 weeks, and hope to make back the $590 debit, plus another $150 or $200 return on the $1,500 margin requirement, say $775 total put-selling income needed to be profitable.
But I actually want to position for a 10% drop in SPY.
I recently bought a Jan'16 $195 put for $905, and in two weeks it has lost me $125 while I have waited for a correction that may be a long time coming. My theta is -.0216, or $2.16/day cost. Can I reduce my theta while I wait?
Another way to get long a put in the Jan 2016 series is to buy a ratio spread:
- sto -1 Jan'16 $210 put for $1,250
- bto +2 Jan'16 $195 put for $1,560 ($780 * 2)
Net debit is $310 plus the $1,500 margin requirement, or -$1,810 in buying power.
Net Theta is -.0203, or $2.03/day cost.
Now I am net long the Jan'16 $195 put, and I can sell the front-month $195 put with pretty good downside protection against a 10% correction. (I don't mind possibly being $5 in the money if SPY goes to $190; rolling for dollars should still be profitable.) Furthermore, with a smaller initial debit I need only $495 put-selling income over 10 months or 43 weeks to make this position profitable.Or:
- sto -3 Jan'16 $200 put for $2,730 ($910 * 3)
- bto +4 Jan'16 $195 put for $3,120 ($780 * 4)
Net debit is $390 plus $1,500 margin requirement, or -$1,890 in buying power.
Net Theta is -.0188, or $1.88/day cost.
$575 put-selling income over 10 months or 43 weeks to make this position profitable.
Probably the smartest thing to do is wait for the correction, then buy a deep in-the-money diagonal for only the number of months I think it will take SPY to recover. ((maybe 200/190 x 3 months, probably for a small credit.)