I mentioned in my last post that I had a limit order in play for new UWM naked puts. It took all of two and a half minutes of trading today for that order to hit. While UWM was trading at $87.13, I sold two UWM April $75 naked puts for $2.70 each and received $539.16 after paying $0.84 in commission.
My original order on Friday was for two puts at $2.90, but as soon as my order came through I saw the ask size jump to more than 100 immediately. I’ve had better luck getting these thinly traded options to hit at a good premium when there are only a few other orders at my asking price. I waited a few minutes to see if any of the algorithms would back off, but when they didn’t, I lowered my order to $2.80. Immediately, the ask size went to 12, then 57. I waited an hour to see if UWM would drop enough to thin out the others bidding on this contract. Nothing changed, so I lowered my order to $2.70 and decided not to chase it any further.
One of the reasons I didn’t chase the order was that there were only 10 other contracts matching my limit order and I thought with just a little volatility, those would drop off. I also wanted to keep my annualized return over 16%. 16% isn’t a magical number. I simply wanted to have a better return for the higher risk of using a leveraged ETF. After seeing Friday’s weakness, I figured stocks could bump around more this week and I might luck into a good trade. I might have been able to get another $0.10-0.20 per contract since UWM fell as low as $86.35 before rebounding above $89.00 in the afternoon.
When I say this contract is thinly traded, I mean that it doesn’t trade that often. While I write this after the market closed, my two contracts were the only ones that traded today and I knocked the open interest down to one. (I checked Interactive Brokers and TD Ameritrade and saw the same reading on both platforms.) I’m not sure how there is only an open interest of one while I’m short two since anything sold is bought by someone else. If I remember, I’ll look tomorrow to see if it updates overnight.
Trading these low volume options can be risky in a fast moving market, but I don’t expect UWM to tank and I’d be willing to take an assignment. This makes the wide spreads found on such options moot to me for exiting. For selling, like today, I get to work the edges of the spread and can pull out a good return usually.
UWM Naked Put Risk/Reward Breakdown
- Potential profit: $539.16
- Potential return: 3.73%, 16.16% annualized
- Breakeven price: $72.30
- Downside protection: 17.02% (about 8.5% for the Russell 2000)
- Recent high: $93.03, hit on December 29, 2014
- Cushion from recent high: 22.28% (around 11% for the Russell 2000)
- Expected support: This morning’s low hit $86.35, which happens to be exactly where the 10-day moving average was today, but below the 50-day moving average. The 50-day hasn’t done much for or against UWM over the past few months, while the 10-day has been support and resistance multiple times. It could work out again, but the more important level to watch is the 200-day moving average at $82.71. This more gradual moving average offered support three times this month when the Russell 2000 dropped. If I was aiming for a short-term expiration, I might have aimed closer to $83 to work this line, but my expiration is nearly three months away, so I looked down to the October low of $68.34 for an expected final support. I’d have a paper loss down there. However, since I think UWM won’t stay depressed for long, I’m willing to ride it out for a better return, especially since I see other potential support around $75.00, where UWM paused going down and up in October.
- Position close goal/limit: Even though UWM could slide quickly from the $82.50 range to the $75.00 level, I’m willing to have the shares assigned. If I buy the shares for a cost of $72.30 and the Russell 2000 goes on to correct 20%, I’ll be down close to 20% also. That’s the advantage of selling so far out of the money. Losing 20% doesn’t sound good, but recovering at twice the pace as the index does. I don’t think small caps will fall that sharply before my options expire. I’m just prepared if it does.