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.

4 thoughts on “Sold MVV November Naked Put

  1. 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. Alex Fotopoulos Post author

    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. 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. Alex Fotopoulos Post author

    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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