Sold MVV November Naked Put

I noticed last week that MVV was trading November options now, but was too busy playing catch up with work after taking time off for my grandmother’s funeral to make a trade on it.  I also wanted to see how far this rally was going to bounce before adding more exposure.  I thought about it over the weekend and decided a slightly out of the money (OTM) put option probably isn’t too risky based on my belief that the market stands a good chance of being higher by then than it is right now.

I entered an order for one November contract and lowered the ask price for my order a few hours later.  By 3:00 I didn’t think it was going to hit, but decided to let it sit for the rest of the day and open a new order tomorrow at a lower ask price, good for the week.  Instead, a little over 40 minutes later while MVV was trading at $71.92 I sold one MVV November $70 naked put for $9.10 and received $909.29 after commissions.

I didn’t realize it until I was writing this post that this contract is my first exposure to MVV in my taxable account.  I have a few of contracts in my IRA and my wife’s IRA too, but none in this taxable account until now.  My mid-cap exposure is up to 20.4% of my Interactive Brokers portion of my account, most of that is from MDY.  MDY tracks the mid-cap index too, but is not a “double” ETF like MVV.  My MDY contract is at the money right now, but it won’t change value as quickly as MVV will.

This trade gives me 16.21% downside protection in MVV before I take a loss on it.  That’s probably 7%+- for what the index would have to lose (factoring in the inefficiencies of the double ETF) and I think it’ll finish the year positive still.  I stand to make 14.9% on this contract based on the cash I would have to spend to buy the underlying shares if assigned.  That’s 22.9% annualized and doesn’t factor in the fact that I’m working off potential margin now.  MVV can even lose 3.7% and I’ll still take a full profit.  I’d rather not cut it that close, but it’s not quite up to me is it?

I still have room to add more exposure before I feel like I’m taking on too much risk.  After bringing in more than $900 already this week from this single trade I might lay low for most of the week as I let this one digest some.  I have a few April contracts coming up for expiration in a few weeks and for now some of those look like they might be assigned.  I should be able to work them back to a profit using covered calls and have them off my books before my longer dated contracts put me on margin.  That just makes it more fun while I work to get there.

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  1. Comment by mark

    no volume in those options dude… and you’re gonna get hosed on the bid/ask spread. Best hope for a huge bull move from here.

  2. Comment by Alex Fotopoulos

    You are correct, but I don’t plan to close this contract any time soon. I’d like to ride it out until expiration, but if not that long I’ll have it at least until 1-2 months from expiration and volume should pick up by then. I don’t need a huge bull move from here, just flat or only slightly down. We’d have to see a huge, quick drop for there to be any early assignment too. I understand your point about the bid/ask spread, but that’s why I used a limit order to get into the position. The risk is there if I want to exit in the near term, but that’s not the plan.

  3. Comment by mark

    Your plan may be to hold to exp., but markets often have other plans. Have you a plan B in case there’s no QE III? Or do you think this bull has legs without FED money printing?

  4. Comment by Alex Fotopoulos

    I could see it stalling in the second half of the year and maybe even coming down some, but not more than 10% before my options expire. A lot of these LEAPS I’ve sold have 10-20% downside protection before I lose any money. Beyond that I can accept some losses for the risks I’m taking.
    The end of QE II isn’t far away and the markets are still working higher. I agree that’s not going to go on all year long.

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