I let my last mid-cap exposure expire with my February put option spread. Until I started writing this, I didn’t realize that I had not gotten back in since then. In fact, I didn’t believe it had been so long and searched my notes and then Quicken because I was so surprised. I’ve certainly had periods where I’ve been bullish enough to go long the high priced ETF, but apparently, I left my account more out of balance than I realized, until today.
While MDY was trading at $222.48, I sold one MDY September $220 naked put for $4.40 and received $439.20 after paying $0.80 in commission. The main reason I sold this put was to balance out my overall allocation better. My plan for the year was to work index ETFs with a somewhat balanced approach and this trade filled my mid-cap gap. It’s a bit more of a commitment to trade MDY than some other ETFs such as IWM because the price for 100 shares is so much higher. A single put is nearly 20% of my account. That doesn’t mean I should’ve stayed out so long. It’s just worth noting that when managing a $100k account, not every index ETF fits in easily every month. I could’ve used a leveraged mid-cap ETF, such as MVV, that trades close to $106. It moves with such a high beta that I didn’t need to take on the added risk, especially since I was using SSO and UWM as other leveraged ETFs already. The industry has other mid-cap ETFs, but MDY is extremely liquid and is where I like to work.
As in most times, I could see another 5-6% correction hitting the market again before long and maybe more in mid-cap and small-cap stocks. The first half of the year was so strong that many investors started getting complacent before the spring swoon. The correction that bottomed in June knocked MDY 9.19% from its intraday high to its intraday low in just over a month. The bulls responded with a recovery rally of 11.91% from the June intraday low to the July intraday high. MDY was 1.81% off its July (and all time) high by the time my order triggered today. That leaves a sizeable chunk to slide if we get a repeat performance of the spring drop. The more likely scenario could be a 50% retracement of this summer’s rally. A dip such as this would bring MDY down to around $215, just beneath my cost per share (including premiums) if assigned. To have a loss, I’d have to be assigned the shares at this nadir. If I’m correct, I could avoid an assignment altogether as MDY bounces from its lows prior to option expiration or I could be assigned the shares and be in a great set-up to ride them higher as the next leg higher kicks off.
I think stocks will be higher in a year and I considered pushing the envelope with a $225 strike, but I expect a better buying opportunity before then and the $220 strike looked better due to the lower cost per share if assigned. The $215 strike would’ve lowered my cost per share further, but the return wasn’t worth the trade. I would’ve been happier going out to October, but the closest expirations were September, which I sold, and December, which offered an annualized return that was relatively light. If this near-term weakness doesn’t amount to anything more severe and MDY stops crossing its 10-day moving average each day, I’ll roll my strike higher and target a bigger gain. Until then, I’m content to try to earn a couple of percent in a flat market.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $439.20
- Potential return: 2.04%, 13.2% annualized
- Breakeven price: $215.61
- Downside protection: 3.09%
- Recent high: $226.59
- Cushion from recent high: 4.85%
- Expected support: $220.00, then $216 or $212 – Each of these levels marks a point when MDY’s previous day’s high become the following day’s low.
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold. My cost should be low enough that I can manage the position with covered calls if I have to.