This trade was actually executed on Friday 06/24/16. I didn’t get a chance to write about it until today.
Since SPY is an index fund, this doesn’t really conform to my core philosophies article on my investment thesis process. I’m simply trying to average into a position in index funds. I’m using options to lower my cost basis and generate income in the process.
As I have previously lamented, SPY goes ex-dividend on “quadruple witching”, which is the third Friday in March, June, September and December. I have no idea how they come up with distribution amount. It seems to be a little over a dollar per share lately. This trade will still be in effect for the September ex-dividend date, and it will expire on the December ex-dividend date. The dividend payments should be quite a bit less than the premium received, so I don’t mind missing out on them. I suppose that December date could make for some interesting assignment scenarios? Whatever. I’m not too worried about it.
The QC (Quantitative Case)
It’s an index fund. There’s no payout ratio, or EPS, or whatever. There is no quantitative case.
SPL (Strike Price Logic)
If you compare this to my $190 trade on the same day on the same underlying security, it is a pretty good illustration of how you can trade downside protection for increased yield.
Throughout this year I would like to have a handful of these mini SPY contracts at various prices. If the market shit-tanks and everything gets assigned, at least I’ll have a varying cost basis. I see this as a kind of dollar cost averaging.
QWaF (Qualitative Warm and Fuzzy)
I would like to have some of my equity exposure through a low cost, broad market ETF like this. It provides diversification compared to picking individual stocks. If you really want to drink the buy and hold index investing kool aid, it doesn’t matter what price you get it at. I don’t completely buy that, so I’d rather get it at a slightly lower price or at least get paid for taking the risk. Options allow that.
CPR (Cold and Prickly Risks)
Maybe the US market is about to enter a prolonged bear market, where equities will lose value. Maybe it is, maybe it isn’t. Index investing ya’ll. Comes with the territory.