Increased Exposure to SDS
Trade: I sold 1 $46 Dec Put on SDS yesterday, for $6.10. (I was unable to post this yesterday as I had limited computer access).
Why: The thesis still remains that the market is overvalued. I also want to increase my short exposure as a percentage of my portfolio.
Tools: This is a complicated trade, but one I’ve executed before. SDS is a double inverse exchange traded fund. So, SDS will rise by ~200% of a market decline; likewise, SDS will fall by ~200% of a market advance. By selling a put, I essentially sold an insurance policy that SDS will fall (selling a market advance).
Reasonably Thinking: I am betting that SDS will be greater than $46 come December expiration. For this to happen, the market would only have to fall about 1.6% (to 996) over the next four months.
My breakeven (after commission and excluding time) is about SDS at $40. Here, the market would have to rise 5.1% (to 1065). Granted this is possible, but clearly a risk I’m willing to take. At 1065, the market would have a P/E ratio north of 15 with an implied return of 6.6%. I would not be a buyer. Any lower of a return (6.6%) and I would consider paying down my car loan (6.25%) rather than investing money.
For the math conscious, the implied volatility on this option was just north of 50%.
I still owe 1 $60 Sep SDS Put; I am about $700 down on that position (taken in late May). This new position should offset some of the loss. In both instances, I still feel like I’m getting free money at the expense of time decay. If the market continues its advance, I may consider buying SDS outright.
