Yesterday I mentioned that I’d probably add more exposure today with an index or sector ETF. After much debate and waiting far too long, I went with a naked put on the Russell 200 index ETF, IWM. I was really planning to add more SPY or DIA to go with the momentum of the big cap stocks that have less volatility than small caps. However, the sell off in small caps was bigger than that of the larger stocks and yet the bounce hasn’t been as big yet in terms of how much ground has been made up. In other words, SPY and DIA are much closer to the recent intraday highs on a percentage basis compared to IWM. That means small caps probably have more upside potential than the big boys. Since small caps generally swing bigger, the premiums are bigger too.
While IWM was trading at $81.77 I sold one IWM June $80 naked put for $1.99 and received $198.27 after commissions. Since this trade pulls me over the 100% invested mark (only by $3,200) I wanted to keep the strike out of the money to pad my risk level some. I’m targeting a 2.54% gain (18.1% annualized) and have a 4.59% buffer before I lose any money. More important than the percentage I can lose before taking a loss. My cost per share (on this trade only) if assigned the shares would be $78.08. That’s a few cents below the intraday low for IWM seen on April 10th.
I believe we’re about to see a move back up to the market highs seen just a few weeks ago and that will pull most of my puts out of the money by expiration. I might even close some option contracts early and roll then farther out. If I’m wrong on the timing and the indexes drop again, I think they will find support on a retest of the recent lows. That’s why I say the cost per share price is important for this trade. I’ll be assigned some of my naked puts, but don’t think the paper losses will be much and I’ll be able to ride the recovery back up from the lows.
This new IWM put adds to the 100 shares I already own that have a June $83 covered call tagged to them and the other IWM put I have at a May $84 strike. I also have three UWM (leveraged small cap ETF) October $25 naked puts that are very unlikely to come into play before expiration.
I’ve taken in $533.95 in net premiums this week and doubt I’ll make a trade tomorrow. My new target is to take in at least $400 in premiums each week. I beat that with today’s trade and more than tripled it last week. I don’t want to get too far ahead of myself and will take is slower next week unless market conditions change drastically.