I’ve been pushing most of my new option contracts out until January 2012 using a longer term strategy over the past few months, but decided I needed some more contracts expiring sooner too. Yesterday I sold a CSX March put and today I went back to an ETF, UWM. UWM is a small cap ETF that attempts to create returns double the Russell 2000 index. While UWM was trading at $47.57 this morning I sold one UWM July $40 naked put for $2.80 and received $279.29 after commissions. This gives me a potential return of 7.5% or 18.1% annualized. UWM can take a drop of 21.78% before I take a loss at all. I’ll need it to not drop more than 15.9% though to keep a full profit.
Since I’m using mostly “ultra” ETFs these days I’m selling out of the money for the most part and trying to reduce my downside risk that way some. As the indexes move higher I feel I can add more exposure as my older puts get farther out of the money. I was planning to let all of my contracts last until expiration, but with the rise in the prices of the underlying ETFs and the drop in volatility I might end up closing some out much earlier. I’ve started entering limit orders to buy some back if they reach half of the price where I sold them as long as they get there in less than half the time of the contract.
I went with a shorter contract this time to for a couple of reasons. First, the longer contracts didn’t seem worth the wait for what I can gain with the shorter contract without a lot more risk. I also want to have some contracts expiring at different times. Since I went 15+% out of the money with this trade I am positioning myself to profit if UWM is down some, sideways or up by expiration. I’d like to see it come down some so I can write new contracts for more money. Since the markets seem to only know one direction lately I felt I had to open up more exposure, even if like yesterday, the potential profit is somewhat small. In the end 18% annualized won’t upset me if it works out.