February 20, 2009:
One way to invest in the S&P500 with a high probability of success is to Sell a naked call at 10% above the current SPY price every month (generally on the third Friday of the month) . - This strategy yields a much higher return than the covered call but yields substantial risk if the stock moves at an unprecedented rate one month. Because of the risk, this type of trade requires considerably more margin than a standard vertical spread and is therefore usually not done in favor of the controlled risk a vertical bear call spread provides. However, it is a very profitable way to play stocks if you use only a small percentage of your portfolio to manage the inherent risk.

A set of naked calls was established today and will be repeated monthly to assess performance. This strategy is better executed using options directly on the S&P500 (Symbol: SPX) This is because it trades at 10 times the price of SPY requiring 1/10th as many options to purchase reducing the cost to get in and out of the trade. However, one disadvantage is that SPX is not traded as often so the spreads are a little higher. The initial trade sold ten $845 call at $8.50. We started with 100k in the account and sold one call (increasing our cash balance to 108470.50).

We are also testing a naked strangle. In this scenario we sell one call at 10% above the current price, and sell one put at 10% below the current price. Only one can ever be in the money so the margin requirements are about the same as a single naked call, but yield twice the return. If we sell ten $845 call for $8.50 and ten $690 put for $12.50. When sold together, our cash balance increases from $100,000 to $122,141.00.

Summary: Naked Call at 10% above starting account value = $99,970. If successful, the one month return is 8.47%
Naked Strangle at 10% above and below starting account value = $99,950. If successful, the one month return is 22.14%

March 20, 2009:
In the first month of trading, the S&P500 promptly dropped an additional 15% from where we started. I felt pretty safe only going 10% because the index had already fallen about 5% when I initiated the trade. However, consistent with the need for the index to remain within its standard deviation range (within the bollinger bands), the index promptly moved back into the average and closed the month up about 3%. Hence, this month was completely successful and the entire profit was achieved.

Naked Call at 10% above starting account value now = $108,437. Naked Strangle at 10% above and below starting account value = $122,079.

The entire amount was rolled into the next month. The closing price was 784.04, so we will sell calls at $860, and $705. The lower side is riskier this month because the index fell below $705 last month, so normally I would take a lower return and set the price lower this month, but not in this experiment. Selling 13 calls at $860 requires $106,077 in margin and will profit $8,680. Since this is a naked sell, the amount will be deposited in our account bringing the balance to $117,117, which will be the balance if the stock stays below 10% (plus interest on the money). For the Naked strangle, we can sell 15 combos for a total amount of margin of $121,272. The net profit is $27,770.05 (after brokerage fees), resulting in a final account balance of $149,849. If the stock stays within the 10% bands, we will have profited 50% in only 2 months.

April 17, 2009:
The market actually moved >10% this month, buoyed by earnings. Not that the earnings were good, but that the analysts were overly pessimistic. The result is that we will have to pay back some of the profits. First. The naked call was sold at 860, but settled at 865.18. We have to pay back $5.18 per share = 5.18 *1300 shares = $6734. We still profited as we originally collected $8680, but the account balance falls from 117,117 to $110383, for a 2 month profit of 10.4%. The Naked strangle also had to be settled but for 15 calls ($7770). So the final account balance falls from 149,849 to $142,079. for our next trade, the market is very pessimistic about any more upside movement and the prices reflect this. Don't be surprised to see the index fall this month. If we sell at 10% above current market, the credit would $4532 for 12 contracts. However, the market is treating 5% up like it treated 10% up last month, if it were me, I would sell my naked put at 5% up which would yield a credit of $9178 on only 8 contracts, but we will keep to the 10% for this illustration, so our account balance goes from $110383 to $114,915. The naked strange would be too risky this month, with no real certain bottom, but I would be very conservative and start at least 20% down, even though this is not below any support level. However, if we did to 20% down, the credit would be $6554 on 12 contracts, bringing the account balance from $142,079 to $148,633. If we did it at 10% down, the credit would be $12254, and if we did 5% up and 10% down, the credit would be $14336 on 8 contracts.

May 15, 2009:
The options expired yesterday but we did not have time to purchase until today on the naked call. The closing price of the SPX was between our option prices so the Naked Call balance is now $114,915. The double naked was also correct so our account balance is now $148,663. The new contracts will be at 10% above and 20% below like before, bringing the Naked call income to $4772 (selling 12 naked calls at $970). The Naked double was sold at 970 and $705 yielding an additional $2225 on the put side for a total return of $6997 on the double naked combo.