Sold VNQ December Naked Put

I started adding Real Estate Investment Trusts (REITs) to our retirement accounts a few months ago and have done well with them as they have been on a great run.  VNQ is Vanguard’s ETF of REITs.  Like other ETFs it holds a collection of stocks.  These stocks just happen to be REITs in a variety of fields from residential and commercial real estate to storage and many others too.  It has a yield of 3.6% and a total expense ratio of only 0.16%. 

I tried to get in on VNQ earlier in the week at the $55 strike, but my high limit order didn’t hit.  This afternoon, while VNQ was trading at $57.10 I sold one December 56 naked put for $1.15 and received $114.29 after commissions.  I was planning to sell two contracts, but eased off at the final moment while I wait and see if it comes off its past two days of new 52+ week highs.

I think $55.00 should offer good support, even after the giddy bull-gone-wild behavior of this week fades.  If $55.00 doesn’t hold I see speed bumps at every dollar down to $44.00.  I see $44.00 as an extreme long shot in the near term.  That’s where this current rally started from in July for VNQ.  If it heads that low I’ll just have to test my patience again and see if I can stomach holding on and taking in the dividends as the ETF works itself higher again.

Speaking of dividends, this option contract expires on December 17th and I think the next ex-dividend date for VNQ is around December 24th based on its pattern over the past year.  Assuming nothing has changed with their schedule and VNQ is below my strike at expiration I’ll be in place to take ownership of the shares just a week before dividends are due.

With only six weeks to go before this contract expires my annualized rate of return is over 17% based on the cash I should have in reserves to back this put.  The bonus is that I don’t actually have that cash sitting in my account available for this put only.  I’ve leveraged myself up a little which increases my return.  I have almost 4% of a cushion to go to the downside before this position turns into a loss.  Most likely I’ll try to add to it again in the next few days with one more contract at the same strike, but for a higher premium.  That’ll put me in a situation where if VNQ dips I benefit by lowering my cost per share and if VNQ doesn’t dip I get to avoid assignment of this put and can continue to use the cash elsewhere.