ETF of the Day – IWM

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.

« « Added Another QCOM Naked Put - | - Dow Jones Chart – Now It Gets Tricky » »

* If you like this post, then consider subscribing to the Full RSS feed or email updates.

DISCLAIMER: While I am a Registered Investment Advisor Representative, the information contained within this site does not constitue personalized investment advice. This material is meant as entertainment and is only a view into how I invest my own account, but not necessarily how you should invest your own funds. Trade using your own research at your own risk. This is impersonal investment advice which means the material written here, in email exchanges, on Twitter and/or other social networking sites do not purport to meet the objectives or needs of specific individuals or accounts.

Other Popular Articles:

- How to Read an Options Table

- Determining an Exit Price for a Stock

- Understanding Downside Risks in Investing

- How Naked Put Selling Works

- 10 Tips for Keeping Emotions out of Investing


  1. Comment by mule

    Hi Alex, Do you ever use Bull Put Spreads? For your example, buying 1 IWM Jun12 70 Put for $35 would drop your requirements (aka max loss) from $7,801 to $836. Free up ~$7,000 for only $35 then make more or larger trades. Something to consider. Cheers.

  2. Comment by Alex Fotopoulos

    Good to hear from you Mule. It’s been a while.
    I’ve used Bull Put Spreads a few times, but not with such a wide spread as your example. I understand the reason to hedge like that, but I don’t expect IWM to hit $70 by June expiration (although I’ve been hit by a black swan more than once). If I was to hedge by buying a put, I’d pull it closer to my short put, at least the $75 strike to try to profit from the long put and then take the assignment on the short put. I don’t like to look at it as freeing up margin because that would lead me to overextend myself far too much and I could pile up $800+ losses. If I went with the $75 strike with my hedge, I’d save $500 of possible losses for $55 more than the $70 strike.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.