Comments on: Sold NDAQ Naked Puts – June 17.50 Strike

By: Alex Fotopoulos

Alex Fotopoulos — Wed, 20 May 2009 16:18:04 +0000

Ronan,
That seems like a reasonable plan, but I’ve never sold LEAPS that far out.
Keep in mind that in 19 months if NDAQ is below $20 you’ll have 1,000 shares instead of 500 (buy 500 now and get 500 assigned later). I see your cost like this:
For covered calls, 17.91-4.80 = 13.11
For naked puts, 20.00 – 6.30 = 13.70
Together your average cost would be $13.40 per share, not counting commissions.
Since NDAQ doesn’t pay a dividend, why not just sell 10 naked puts instead of buying any shares up front? You could put your cash you would have used to buy the shares in an interest paying vehicle or, if you are more daring, you could use it to back other positions over the next 19 months.
Also, remember if NDAQ goes much lower you always run the risk of early assignment. If that happens you could dump your shares for a loss, but possibly still have an overall profit if NDAQ is above $13.70.
Also, I see this as more of a 45+% profit – 13.70 cost and max gain of 6.30, 6.30/13.70 = ~46%.
Let us know what you do, I still think it looks interesting to watch.

By: Ronan Mc G

Ronan Mc G — Wed, 20 May 2009 12:04:16 +0000

What do you think of the following type of trade on NDAQ:

Buy 500 NDAQ @ $17.91, Sell 5 Jan. 2011 $20 calls @ $4.80, Sell 5 Jan. 2011 $20 puts @ $6.30.

If NDAQ is below $20 in 19 months, you’ll have 500 shares at a $13.41 average cost. If they’re above $20, your Call will be excercised and you’ll have $10,000 for your initial $3,405 investment .

The shares can drop 25% and you’ll still not be losing anything. If the shares rise by 12% or more, you’ll have $10,000 for your initial $3,405 investment – a return of almost 200%.

By: Alex Fotopoulos

Alex Fotopoulos — Wed, 13 May 2009 17:34:05 +0000

I feel pretty good about the 17.50 strike. I posted a chart on my other blog this morning, Chart-Analysis.com. Keep in mind that if your 17.50 stike puts are assigned, that will mean that NDAQ is below 17.50 and the call premiums will be much lower by then, especially when you include time decay. Hopefully we won't get there too soon and we can just keep rewriting the naked puts. Thanks for sharing your trade details.

By: Ronan Mc G

Ronan Mc G — Wed, 13 May 2009 14:47:26 +0000

Similarily to you, I have been selling PUT options on this over the past few months (very high premiums ). I decided to follow a similar strategy to yourself and move from the $20 strike to the $17.50 strike yesterday. My timing wasn’t as good as yours but I’m happy enough with the change in risk/reward. I do hope to, eventually, let the shares be assigned to me and begin selling covered calls (the June $17.50 calls last traded at $1.65 which would give a months return of 6% if assigned and give downside protection of over 9% from the current share price if unassigned).

Yesterday, I bought back my 2 June 20 Puts at $1.54 costing $309.40 after commissions and, today, I sold 3 June 17.50 Puts at $1.01 receiving $300.90 after commissions.

I’ll have an extra 100 shares to purchase if assigned but I’m happy with the change in risk/reward. If we ignore the options premiums as there was only $8.50 difference in the May/June premiums, one way of looking at it would be that the 100 additional shares cost me $12.50 each – $5,250 for 300 shares as opposed to $4,000 for 200.