I keep feeling like I’m missing out on something since I haven’t been trading much over the past month and a half. The good news is that I haven’t missed out. My account balance grows when the market stays flat and when it moves higher. The surge in prices today got me to add some more risk or more accurately, increase some risk. I already had three IWM September $100 naked puts and figured I should increase my risk by raising the strike and rolling out the expiration a couple of months.
While IWM was trading at $103.71, I bought to close three IWM September $100 naked puts for $0.44 each and at the same time, I sold to open three IWM November $103 naked puts for $3.26 each. I received $841.38 after paying $4.62 in commission. I debated this one far longer than I should’ve. I was concerned that IWM would reverse and sting me with a loss. It’s was up $1.32 when I made my trade, so just a dip back to yesterday’s closing price would move my new options in-the-money. I recognize that I’ve been too afraid of taking a loss and decided to push it a little more with this trade.
I spent a while trying to talk myself out of the trade, but finally found some logic I could live with. I compared the cost per share difference of being assigned IWM puts based the current premiums for the September $100 puts with the November $103 puts. It amounts to a whopping $0.18 per share. ($100 – $0.44 = $99.56 and $103 – $3.26 = $99.74, not counting commission.) That means that over the next two weeks (the time until my September strikes would expire), I might lose $54 (0.18 x 300) more by making this trade than I would’ve if I let the September strikes stay in place. If it works out, my return will be much better than that.
If I had not made this trade, IWM might have fallen some, but not below my $100 strike. That would’ve left me in the position of not having to buy back the September puts and also being able to sell the November puts for more money. Then again, if IWM continues to rise like I think it will, the November $103 premiums will be lower by more than the $0.44 I paid to buy them back and my net intake would be less. There’s no way to know how the prices will move over such a short period of time, but since a fair amount of my other positions look more comfortably out-of-the-money, I decided to increase my risk on this position by $0.18 per share.
My belief is that prices will rise over the next couple of weeks and that was the true decision point that got me into this trade. I didn’t want to go in-the-money in case I’m wrong. The premiums farther out-of-the-money didn’t make the trade worth as much as I thought I could get relatively safely. Since I’ve been more cautious on other trades, this one earned the higher strike/risk and bigger potential return.
My three other September options are mixed. MDY is barely out-of-the-money. DIS is in-the-money, but I’m confident in going long DIS. My SSO puts are far out-of-the-money and cheap. I might roll these SSO puts later this week, but would like to do so on a down day so the premiums are better. MDY is still close enough to its strike that it has a good bit of time value left and I don’t plan to give that away yet. I’ll probably write another naked put to go with my pending 100 shares of DIS and will sell a covered call on it also.
The fundamentals are improving around the world and that got stocks out of their slide. The known risks coming up are from the Fed tapering timeline and Syria. I don’t expect the downside to last long on any “scary” news on Fed front. If anything, any weakness should be seen as a buying opportunity. The unknown path in Syria has traders worried, but I don’t think it’ll play a large role in disrupting companies’ profits and isn’t that what stock prices are still based on?
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $975.68
- Potential return: 3.26%, 17.1% annualized
- Breakeven price: $99.75
- Downside protection: 3.85%
- Recent high: $105.62 on 8/5/13
- Cushion from recent high: 5.56%
- Expected support: $100.00, if not any of the moving averages (10, 20, 50 sma) scattered between $101.89 – $102.55.
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold. My cost might be higher than I’d like in a real correction, but this should be one of the few positions I carry a paper loss on if small-caps corrects.