Sideways moving markets can be great for option sellers and can be somewhat boring sometimes too.  Option sellers have the advantage of making a profit (or a reduced loss) in a sideways (or slightly down) market if the premiums were traded at the right time and strike.  I haven’t made a trade this month because I wanted to see how the little dip was going to work out.  Now that we seem to be recovering, I know I need to get on the ball and up my exposure.  Luckily, even though I’m not fully invested, I do have a few puts that are in-the-money and give me good upside exposure.

The timing on my two puts that expire today was mixed.  I have one DIS August $82.50 naked put that will expire out-of-the-money since DIS is trading above $89.00 as I write this in the morning.  I should’ve rolled the puts higher last week when the stock moved above its 10 and 20-day moving averages after multiple weeks of moving sideways.  Still, I finish the contract period with a full profit and that’s always a good thing.

My two FEZ August $44 naked puts didn’t work out as smoothly.  FEZ is up again today and has been climbing steadily for a few days, but hasn’t made it back above my strike or even to a paper profit on the options.  FEZ is trading at $40.46 as I write this, up $0.28 on the day.  The Europe ETF is facing resistance at its 20-day moving average and I expect it’ll move higher through the moving average, even if it pauses there briefly.  Rather than closing my position, I’m going to take the option assignment and buy 200 shares of FEZ at $44.00.

Thanks to the premiums I received from selling the puts, my cost per share will be reduced to $41.89.  While that’s still $1.43 below the current price for FEZ, it’s much better than if I had bought FEZ shares for $43.67 (the price of FEZ when I sold these puts).  Looking back on my expected support from May 13, when I sold these puts, nothing I predicted really worked.  The 200-day moving average held support for a couple of weeks, but then the bottom fell out.  As I said then, I don’t mind taking this assignment.  It’s less than 8% of my current account value and probably doesn’t have more than $5.00 more of downside at the worst more likely, not more than $2.00 (5.0%).

Just as I was finishing writing the comments above, about 12 minutes after I noted the price of FEZ moving higher, news came out of military action in Ukraine on Russian forces that had crossed the border.  FEZ nose-dived and a limit order that I entered a few days ago hit.  While FEZ was trading at $39.78, I sold two FEZ September $40 naked puts for $1.00 each and received $198.42 after paying $1.58 in commission.  My logic for this trade was that I wanted to lower my cost per share if FEZ fell further while I was long the shares.  Since I knew I didn’t want to sell covered calls on my FEZ shares yet due to both how cheap the premiums are and my expectation that FEZ is on the rebound, I wanted premiums from somewhere else with the belief that FEZ would trade flat in the worst case.  That theory might not float if Russia keeps pushing on Ukraine, but the markets haven’t run off the rails yet.  Then again, every time I divert my eyes from writing this, it appears the indexes are melting lower.  It’s just not a panic yet.

When I placed my limit order, FEZ was pushing higher.  I placed my order at the ask price, only 10 cents above the bid at the time.  I thought it could hit on a small move lower as part of the ebb and flow of regular daily movements.  At the time, Russia was pulling back and everything was starting to look rosy again.  I figured I could get a quick profit if I kept the duration short, so I went with the September contracts instead of going out to the next ones available in November.  Also, by going shorter-term, I’ll be able to re-write new contracts sooner if these aren’t assigned and have a better annualized gain.  If I am assigned another 200 shares, my cost will be $40.45 and will give me a much better (and quicker) opportunity to turn this position into a profit.  On the downside, I don’t get as much cushion as I would have with the November puts, but the difference wasn’t as much as I would’ve expected for tripling the duration.  What’s crazy is that I just realized this is my first option assignment this year.  Everything else has finished above my strikes or I closed early.

FEZ Naked Put Risk/Reward Breakdown

  • Potential profit: $198.42
  • Potential return: 2.54%, 25.43% annualized
  • Breakeven price: $39.01
  • Downside protection: 1.94%
  • Recent high: $45.26 on 6/19/14
  • Cushion from recent high: 13.81%
  • Expected support: FEZ is already below the three points of support I identified in May and it also hit a new high while I was short those puts.  Let’s hope I’m better predicting support this time.  $38.86 was the low on February 3.  I’d like to see it hold again.  This expectation was my main reason for choosing the strike I sold.  If the February low doesn’t hold support, FEZ could quickly fall to its low on August 30, 2013 of $35.16 and would officially be in a bear market at 22% below its high.
  • Position close goal/limit:  Since I’m working this trade while already being long 200 shares of FEZ, I have the mindset that it would be good to lower my cost per share.  While I’d rather take a full profit on these puts and sell my long shares for a profit, I’m still comfortable taking an assignment of another 200 shares.  An assignment for a total of 400 shares could push my allocation to around 15% of my account value.  Depending on how my other positions have worked through next month, I might consider selling another two puts out-of-the-money on FEZ.  Eventually, the ETF will rebound and with a beta of 1.27, I want to be long when it heads north, even if I mistime a couple of entry points.