Sold IWM July 52 Naked Put

As I’ve sat on the sidelines with most of my cash idle for the past few months I’ve missed out on a lot of the rally.  I decided I should make an attempt at putting a little more money at risk.  I’ve made a few individual stock trades, but wanted more exposure still.  Since I base my success partly on beating the major indices I started eyeing the iShares Trust Russell 2000 Index Fund (NYSE Arca: IWM).

During a rushed lunch today, as the markets were coming off their lows, I charted IWM and saw it was finding support on its trend line of higher lows that started a few months ago. This is also just a couple of point above IWM’s 50 day moving average.  Not being a full bull minded investor still, I thought I could ease in with one contract, not hedged.  While IWM was trading at $50.96 my limit order hit and I sold one IWM July 52 naked put (IWMSZ) at $2.60 and received $249.25 after commission.

Yes, that was an in-the-money option sale.  No, that was not my intention.  As I mentioned in the previous paragraph, I was rushed and that caused me to make the careless mistake.  I didn’t try to back out of the order after I realized it because if I’m right and IWM goes up I’ll make more.  If I’m wrong and IWM goes down I’ll still be getting into IWM lower than the current price (after premiums are deducted).  If I sold more than one put I probably would have turned around and hedged this trade by buying a lower strike put. 

I meant to sell my put at-the-money, but missed by a dollar which added about $50 worth of risk/reward to my trade.  By selling only one put at the money I figured IWM could stay flat for a month and I’d take a full profit.  If it dipped a little I’d take the option assignment and then sell a new naked put out-of-the-money and a covered call out-of-the-money.  That would put me in a position to guarantee a profit on one leg of the option straddle (and maybe both) while I take on the risk of adding to my number of long shares if the new naked put is assigned.  If it is assigned the second time, I’ll have three premiums (from two naked puts and one covered call) to reduce my cost per share.  My second naked put will be at a lower strike too so that will give me another reduction in average cost per share.

This will be interesting to see how it plays out.  I have a limit order in on MDY (Midcap 400 ETF) that hasn’t hit yet.  I made sure it’s out-of-the-money a little further since the price per share is twice that of IWM so easing in isn’t as easy.