What Am I Buying and Selling Tomorrow?

If you keep up with this blog, you know that I have owned Gladstone Commercial Group (GOOD) since I began my portfolio back in January.  Tomorrow, I am going to look to sell my entire position (77.607161 shares, including reinvestment over 7 months).  I am going to look to sell out of that position at $17.00, giving me a nice gain of 26.27%, over an average cost basis of $13.46.

In it's place, I will be purchasing deep in-the-money calls of the S&P 500 ETF, the SPY.  I have stated here quite a few times that I believe we are going to see a nice run in the market through the end of the year.  At a minimum, I am looking for the S&P to hit 1,250 or higher by year's end.  Currently, the index is at 1,121.64, which corresponds to a price of $112.392 in the SPY.  A year-end close in the S&P 500 of 1,250 would correspond, roughly, with a price of $125 in the SPY, up 11.22% (roughly). 

Now, to the trade:
With the proceeds from the sale of all my GOOD stock, $1,319.32 (exclusive of taxes and commissions), I am going to purchase one of the December 18th $102 Calls for ~$12.75 ($1,275 total = 100 shares per contract x $12.75).  A share price in the SPY of $102 correlates loosely to an S&P 500 level of 1,020, down by 9.96%.  Anything above that level and we will still retain some capital, and the breakeven is at $114.75 ($102+$12.75) in the SPY, which equates roughly to an S&P 500 level of 1,148, up 2.35% from here.  Should the market go to 1,250, and we see the SPY go to $125, this trade will pull in a tidy gain of $1,025 ($125-$114.75), or 80.39%.

This is a good example of a) a stock replacement strategy using options, and b) leveraging your money, both of which I am going to do more with in this blog, as I have done in my personal portfolio.  Had I purchased 100 shares of the SPY at $112.392, it would cost me $11,239.20.  If the SPY goes to $125, as I am predicting by the end of the year, I would see a gain of $1,260.80, or 11.22%.  Not bad, but not nearly the rate of return I can get with options for a minimum capital outlay.