Options for Making the Market Bearable

Another position that remains open but at the mercy of the market is the butterfly spread in the S&P 500. On the call side, we had the April 850/875/900 butterfly, and on the put side, the April 725/750/775. Each position was established for roughly a $2 debit and afforded a maximum profit of $23. Right now the odds tilt in favor of the S&P landing on 875 come the April expiration. Again, given the limited risk, this is a position where you watch and wait. As expiration approaches, trading off of one side might be possible.

The most recent strategy suggested selling puts against short stock, which illustrates both the good and the bad of options strategies. Since I put forth this bearish strategy last week, the S&P has rocketed some 7.5%. But as I emphasized in the article, you need to be very particular in choosing which stocks to employ with this position.

The three I mentioned, Cognizant Technology Solutions (CTSH Quote), Devon Energy (DVN Quote) and Nike (NKE Quote), are all trading lower than the recommended sale price. That's good, and it speaks to the value of technical analysis.

But specifically in the case of Cognizant, which has dropped from $69 to $62, I would have been much better off just shorting the stock and not getting too cute by also selling puts. Though I can take off the position for a profit right now, if I want to realize the maximum gain, I'm stuck until the April expiration.

I also want to address one position that ultimately realized the maximum gain but would've caused incredible pain along the way: the shorting of the S&P 500 March 825 put for 23 when the index was trading at 845 in early February. Now, with the S&P at 860, it looks like the put will go out worthless this Friday, and we'll collect that premium.

But during this past month, as the S&P broke below 800, the position would have been registering a huge drawdown, to say nothing of the many sleepless nights you would have had to endure. This is a great example of why options work best when you create a limited-risk scenario.