Tuesday, August 24, 2010

SPY - New Position

A new CSP position was established today on SPDR S&P 500 ETF (SPY). All prices include IB commissions.

This position is to test a new strategy of selling puts at least 15% OTM on SPY as an alternative to holding excess cash. The goal is to earn an annualized return equivilent to a 10 Year US Treasury in 30 days or less. With interest rates near zero for an extended period, I'm not earning any interest on the cash in my account. There are not a lot of choices for short term investments which can match 10 Year Treasuries, so I did a study of the S&P 500 closing prices at each option expiration since 1950. The study showed that there have only been 13 months, in the past 60 years, where the S&P 500 has declined by 10% or more, only 2 months where it declined by 15% or more, and only 1 month where it declined by 20% or more (Oct 2008).

Since I want to get as close to a risk free position as posible, 15% downside protection for a 1 month SPY Put seems to be a reasonably safe level, based on the performance of the past 60 years. However, as we all should know by now, past performance is not necessarily indicative of future results. Oct 2008 proved to be one of those times, with the largest 1 month decline in 60 years at 25.1%.

I'm going to test this theory for the next few months with a 100 share position. If it works out well, I'll increase the position size to put more of my idle cash to work when there are no other opportunities available. This month I decided to use the Sep quarterly expiration rather then the normal expiration since it provided better downside protection and a better annualized return.

DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
8/24/2010SPYCSP Margin UsedCSP 100 SPY @ 87.00 ($8,700.00) 
8/24/2010SPYInitial Put OptionSTO 1 Sep10 87.00 Put @ 0.25  $24.99

Position Summary

Cost Basis($8,700.00)
Income Generated$24.99
Percent Income Generated0.29%
Annualized Income Generated2.91%
Net Profit If Assigned$24.99
Percent Return If Assigned0.29%
Annualized Return If Assigned2.91%
Days Held to Expiration36 days