Although I already have some small cap exposure through IWM naked puts I decided not to wait any longer before selling my first LEAPS on ProShares Ultra Russell2000 (UWM). The “Ultra” part of the name signifies that ProShares tries to seek results that equal twice the daily performance of the Russell 2000 index. Since I’m still bullish on the market’s chances in 2011 I’m continuing my LEAPS usage. I think small caps stand a good chance of outperforming the overall market and plan to add some more of contracts at this strike.
While UWM was trading at $43.71 I sold one UWM January 2012 $45 naked put for $10.70 and received $1,068.99 after commissions. I sold this same contract in my IRA last week too and actually did better today than I did back then when UWM was actually trading lower by a little bit. The spreads are fairly big between the bid and ask and this time I was more patient and aimed higher with my asking price. Yesterday I had a limit order in for two at $10.50 and it didn’t hit for me, but did hit for my client. I left mine in for the rest of the day and even lowered it to $10.40 in the final hour of the day. Oddly, UWM is higher today than yesterday, but my order hit at a higher price. Yesterday’s order had the feel of a market maker taking the other side because it was an instant trade as soon as I sent the order. Today it hit about 13-14 minutes into the trading day which made me feel it was another “little guy” buying some downside protection.
Being an “Ultra” ETF, UWM can be very volatile, but with such a good premium and being so close to the money I have a good cushion to the downside. UWM can drop as much as 21.28% before I have a loss on paper. That’s probably about 8-9% downside for the Russell 2000 which I don’t expect, but at the same time don’t think it’s impossible. I only need UWM to gain 4.41% in the next 55 weeks for this contract to finish out of the money. I could actually see it gaining 15-20% with a few minor corrections mixed in. I didn’t aim for a higher strike because I stand to make an annualized return of 29.4%* (or 31.2%* over almost 13 months) as it is. Instead of aiming higher, I might actually aim lower for my next UWM LEAPS. The $40 strike has a bid/ask of $6.30/10.60. I think a limit order at $8.00 would hit fairly easily and maybe higher would work too. That’d be a good return too and an even bigger cushion to the downside.
I like the way I’m starting to position myself for next year and am excited about the possibilities once we get past the first couple of months and can get a better sense of what’s really going on when Santa Claus is long gone and the masses are back at their trading desks.
* A note about my returns. I just noticed I don’t think I’ve been calculating these the right way in my previous posts and changed it in this one. Tell me which way you think is correct. I was using the strike as my cost, but I think I should be using the cost after subtracting the premium as my cost per share. I used the latter above.
- The new math runs like this: Profit/(cost per share if exercised x 100 x number of contracts).
- For example for this trade it went like this: $1,068.99/((45-10.69) x 100 x 1) = 0.311568 aka 31.2%
Is that correct or should I have stuck with using the strike as my cost? I’m only looking at this part now, but if you see another area I made a mistake please let me know.
Nice trade and good hit. I wouldn’t be surprized if you were able to exit the position very early in the year for a good profit.
I didn’t have anything hit today – I had an order in for the purchase of Jan ’12 Calls on ISRG – which I’ve had a position in before but exited earlier this year. I’ve also been eying up ICE, NDAQ and NYX. Not sure which of these I like best but have kind of ruled out NYX because of their large dividend – I don’t want to be facing a 4% headwind by owning Calls on this stock.
On the calculations, I agree with the method that detucts the premium from the strike.
Thanks for the feedback on the calculations.
I won’t be surprised if I’m out of it by mid-year and rolling higher.
I’ve been watching NDAQ too. It used to be one of my staple trades, but once it broke out above $21 it moved out of my trading channel and I don’t know how to play it now. I should’ve gotten in again when I saw support hold above $21 at the end of November, but didn’t. Maybe if it tests $23.25 that could be a good entry point again. I’m not sure though. It was one of my 2009 stock picks in the little blogger competition I’m in and it failed me then, but it’s typically good for options. It’s crazy to think just in September I had $17 strike puts expire. Too bad I didn’t aim higher.
Alex,
I am using a little different approach on UWM. I have a FEB naked put order at $34 (i see some support there)which i am hoping will hit on Monday. I like your trade as well but I don’t have that much patience.
Alex,
I would tend to use your previous method for calculating ROI – I think it’s more universally accepted. The reason for this is that, once you factor in exercise or assignment scenarios into your calculations, I believe you skew your real rate of return. Having said this, though, I have personally found over 15 different ways to calculate ROI on naked puts all over the blogosphere, with everyone fairly certain their way is the best. To each his own, I always say. Personally, I don’t like to calculate rates of return due to the abstract nature of naked put selling. It is not as though you’re walking into a bank, putting some money into a savings account or a bond, and coming back some time later with a return that’s known beforehand. I know I sound freaking philosophical here, but all we’re doing is betting on a certain outcome. The only difference between us and professional gamblers is that probability is on the side of the prepared.
Now, about your trade – I like it a lot. I’m going to do the same thing, but I feel a substantial correction is coming within the next month (I could be wrong or right), but I have a plan to sell an ITM UWM put at levels 5-7% lower than today’s level. Other than that, best of luck in the coming year and I look forward to many more great posts from you…
I basically use your new method to calculate my returns. The generalized formula I use is:
Simple Return = Net Option Income / Cost if Exercised.
This can even be expanded to apply to include scenarios where contracts are rolled out and strike prices are changed. I include transaction costs in all of my calculations.
There is a time element to monetary returns so I also calculate an annualized return for each of my option trades which allows me to compare competing trades on that basis. The generalized formula for this is:
Simple Return / Number of Days to Expire * 365.
It’s all done in a spread sheet so the calculations are completely painless. 🙂
Bill
i actually used the APR put..got filled at $1.80 which is a much better premium than what I was getting for Feb (.70).
Alex,
Happy New Year, I’ve enjoyed your posts. Your last post mentioned selling puts in your IRA, what brokerage firm do you have your IRA with? Keep up the good work in 2011.
Brian
@ John, You are correct, there are tons of different ways to calculate something that doesn’t really matter until the position is closed. I like using this newer formula since I consider the cost to be what my out of pocket cost would be to buy the shares. Using the strike ignores that the premium is received up front.
@ Mateen, I like your trade. I might consider one there too after I see how the first couple of weeks play out.
@ Bill, I stick mine in a spreadsheet too, but use weeks instead of days for the same result. That’s how I have my upside/downside/sideways percentages for each post too. I agree also, you have to include transaction costs.
@ Brian, I still have my wife’s IRA at TD Ameritrade (AMTD) since I’m not as active in it and avoid the $10 monthly fee Interactive Brokers (IBKR) charges on my other accounts. AMTD’s commissions are $9 more though, so one trade a month makes IBKR worth the monthly fee.
I appreciate all of the input and thank you for reading.
Yesterday, I got into ICE as planned.
Basically, I put in an order to sell a Jan 2012 115 Call at the Ask ($15.00) and an order to buy a Jan 2012 110 Call at the Bid ($16.50). The plan was:
In the unlikely event that both orders had hit, I’d have a cheap Bullish Spread costing $1.50 for a max profit of $3.50; or
If only the long Call hit, hold it and start weighing up my options for selling shorter term Calls to reduce the cost (like I’m trying with SKX); or
If only the short Call hit, buy the shares to cover the Call. Using the current share price and option ask price, this would result in a $97.58 basis and an 18% return for a 2% rise in the share price
Forgot to say, it was the long Call that hit at $16.50. ICE subsequently dropped a little but I’m going to wait for a (hopeful) rise above $115 and then sell a Feb 2011 120 Call Option to reduce the cost of my long Call.
Nice planning Ronan. You might have more patience than I do.
Yeah, I thought it might be a good idea to try the two sides of the trade on the ‘good’ end of the Bid-Ask spread. It doubles up my chances of one of them hitting during the day/
ICE has had a great jump above $115 this morning but, unfortunately, I’ve forgotten to bring my code card to log into Interactive Brokers to work so I’ll have to wait a while before I can make a trade and sell a shorter term Covered Call.
I think you can get a temporary card that you can print out from IB, but that might reset your regular plastic card and require a phone call to their helpdesk.
Thanks for the heads up Alex. I wasn’t aware of that – although I’m sure there’s probably a charge for it.
Anyway, I just sold 1 Feb 120 Call at $2.50 bringing my cost of the Jan ’12 110 Call down to $14.00 (assumming the Feb Call expires worthless).
I’m sitting on the SKX position at the moment hoping for a small drop next week so that my short Jan 20 Calls expire worthless or close to it.