Sold DDM Naked Put

Like most bullish investors, I woke up to see some exciting futures this morning only to see them improve even more with each piece of data and news story that hit the wires.  I was considering opening more exposure on Monday (and obviously should’ve), but the opening pop was so strong that I thought I had missed it the majority of what might last.  On Tuesday it looked like resistance was going to hold the markets back as it rolled over in the afternoon.  I decided to wait for a clearer sign that this wasn’t just a dead cat bounce.  This morning’s rally was hitting on all cylinders and I decided I couldn’t afford to wait any longer.

Rather than get too aggressive I decided to use last week’s low as my target and worked from there.  I decided to use DDM, a double the daily return of the DJIA ETF, as my tool of the day.  While DDM was trading at $57.77 I sold one DDM January $51 naked put for $1.80 and received $179.57 after commissions.  DDM hit $50.86 last week as an intraday and closing low.  With the positive data coming out today (and throughout the month excluding Europe) I don’t think we’ll revisit the October lows, but could retest last week’s lows.  I don’t see it as too likely, but possible and that’s why I didn’t want to get overly aggressive with this trade.  I’m only looking at a 3.6% return if this works out for me, but that’s 27.8% annualized and the risk isn’t massive.  DDM can drop 15.14% before I take a loss which is equivalent to more than 7% in the DJIA.

It’s easy to want to jump in with both feet on a day like today when they Dow was up over 400 points for most of the day and the SPX was up over 40 points too, but Europe’s troubles are far from over and we still have Friday’s employment report due.  A lot can change very quickly and I’d rather settle for a 3.5% return in seven and a half weeks than risk another substantial beating.

The best part of this week’s rally for my account is the advance small caps have taken and in particular my UWM exposure.  I’m long 100 shares and have six January $30 naked puts on UWM plus one January $35 put, three January $40 puts and one January $45 put.  The January $30 puts look more and more likely each day to finish out of the money and the others are eating away at the intrinsic value and the little time value still included.  I haven’t closed my TWM (inverse UWM) puts for December $39 yet, but might have to soon if this rally continues through the end of the week.  I’m expecting some give back at some point though as we’re starting to draw in closer to the November highs (or the lows in TWM’s case) again.