A new 100% Cash-Secured Puts position was established early in the trading session today in the SPDR S&P 500 ETF (SPY). Two April 17th, 2020 $235.00 100% Cash-Secured Puts were sold at $8.85 per share. Because the Volatility Index (VIX) remains very elevated (currently at about 60), the bid/ask spread for the options on most individual equities is very wide making it much more difficult to execute trades near the midpoint of the spread. However, SPY is the most liquid equity in the options market and the bid/ask spreads there are much tighter. For example, the Open Interest in the SPY $235 Puts is now very high at 123,399 contracts and there was only a $.07 bid/ask spread when these Puts were sold today in the Covered Calls Advisor Portfolio. Another anomaly is that the Implied Volatility of SPY options is now higher than it is for the majority of the 500 individual stocks that comprise the SPY index. So, during this temporary time of very high volatility, potential returns for selling options on SPY are actually higher than doing so for most of the large-cap stocks included in SPY. When VIX declines to its more historically normal levels, this situation will reverse and individual stocks will then provide higher return-on-investment potential than the SPY ETF, and I will then also revert to my normal preference of investing primarily via individual equities rather than the large ETFs (such as SPY, QQQ, and EEM).
As always, please email me at partlow@cox.net with any thoughts or questions you might have related to this post or anything related to Covered Calls investing.
As detailed below, the potential return-on-investment result for this SPDR S&P 500 is +3.8% absolute
return in 23 days (equivalent to a +59.8% annualized
return-on-investment).
SPDR S&P 500 ETF (SPY) -- New 100% Cash-Secured Puts Position
The transaction was as follows:
03/26/2020 Sold 2 April 17, 2020 $235.00 100% Cash-Secured Put options @ $8.85 per share
Note: The Open Interest in these Puts was 123,399 contracts
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $47,006.29
= $235.00 per share * 200 shares +$6.29 commissions
Net Profit Components:
(a) Options Income: +$1,770.00
= $8.85 * 200 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If SPY is above $235.00 strike price at Apr 17th expiration): +$0.00
= ($235.00 -$235.00) * 200 shares
Potential Total Net Profit (If SPY price is above $235.00 strike price at April 17th options expiration): +$1,770.00
= (+$1,770.00 options income +$0.00 dividend income + $0.00 capital appreciation)
Absolute Return: +3.8%
= +$1,770.00/$47,006.29
Equivalent Annualized Return: +59.8%
= (+$1,770.00/$47,006.29)*(365/23 days)
