Sold AXA Naked Puts

I started following AXA after Barron’s wrote a bullish cover story on it a few weeks ago.  It gapped up on the next trading day after the article was printed and I waited.  I wanted to see if it could get past its trend line of lower highs that started in October.  On Friday it crossed that line and stayed above it through today (so far).  I checked Ford Equity Research report and saw they rate it a Strong Buy now too.  (I didn’t look at this until now; they might have had AXA rated high for weeks.) 

The Barron’s article made a convincing bullish case, but I still have a lingering concern about the dollar improving which would weaken the stock price for the NYSE shares.  That concern held me back from opening a position on AXA, but when I looked at it (and how much of my account I don’t have working for me) again this morning I decided to sell some out of the money puts to reduce my risk.  While AXA was trading at $24.07 I sold four AXA February $22.50 naked puts (AXANX) at $0.75 and received $297.20 after commissions.

I started by entering my limit order for $0.80, but after a few hours it had not hit and the bid was still down at $0.65.  I lowered my ask price to $0.75 and it hit within an hour.  I decided the five cents wasn’t worth the possibility of missing the trade.  For this trade to work out for me AXA will need to finish at February expiration above $21.75, a price it hasn’t seen since September 4th.  You’d have to go back to July 31st to find a day AXA stayed below $21.75 for the full day.  That gives me more confidence in this trade over the next seven and a half weeks.  I wanted to sell nearer term puts, but with volatility so low, the premiums are hardly worth the trade so far out of the money.

I’ve gotten in the habit of selling only front month options lately, but am starting to second guess that strategy for a few reasons.  With most, if not all, of my options expiring each month I’m not reacting quickly enough to stay fully invested.  Selling some options one and half to two months out will allow me to stay more heavily invested.  Any further out and the premiums don’t deteriorate fast enough to make the risk worth it for me.  The closer month premiums are obviously smaller than the ones with more time value.  I’m getting back to being able to accept more risk on time to get the larger premium if that’s what I need to do to be invested fully again.  I’m not so bullish yet that I plan to sell many options at the money, I still like buying at a discount when I’m wrong on the price the stocks move after I open a position.  Most likely with the reversion to my old way of selling puts I’ll get more option assignments, but as long as we don’t get quick deep dives lower I should be able to maintain gains over each rolling six month period.