Sold MDY Naked Put for March

Going into today’s 2:00 pm Fed rate decision, I expected a quarter point rate hike, as did practically all of Wall Street. They telegraphed it very clearly and did not disappoint. I entered a limit order for an MDY naked put at the money on the high side of the fairly wide bid/ask prices. My expectation was that in the final few seconds before the announcement, the ETF would spaz (technical term!) and I might get a trade in.

After I entered my order, the bids dropped by nearly a dollar as the air started to leave the room. I clicked on my order and was going to raise my ask price, but my order triggered precisely at 2:00 as the ETF showed trades $0.62 apart in the first 5 seconds of the hour. While MDY was trading at $306.14, I sold one MDY March $305 naked put for $9.50 and received $904.74 after paying $0.26 in commission.

The ETF traded as expected with its quick flutter of algorithmic/flash trades and I got the trade I wanted, but I thought stocks would stay fairly flat and option prices would drop a little as the clarity on the single piece of data calmed the volatility input from the equation. Instead, stock prices have dropped in the half hour since the announcement and I see that I could’ve sold the put for as much as $10.10 (I’m making an assumption based on the bid/ask I saw of $10.00/10.30).

Even without getting the best premium that I could’ve received today, I’m looking at a decent potential return on this trade. If it goes my way, I’ll have a 3.18% gain or 12.25% annualized based on the 13.5 weeks away from expiration. MDY can drop 3.49% before I take a loss. I won’t be surprised if MDY makes it back down to my $295.60 cost if assigned, but I do not expect it to stay down in that range for long if it even gets there. I originally planned to sell the $300 strike put, but with an expected area of support around $295, I figured it was worth the risk of the $305 strike put over a 10% annualized return from the $300 strike.

I’m going to sell my 100 shares of both MDY and IWM at the end of this week when my covered calls are assigned. Rather than weight the extra two and half days for these assignment trades to become certainties, I opted to take the small risk that MDY wouldn’t fall more than 5% in this small window. Because I’m not completely crazy, I am waiting another day to open a new IWM position. I expect that by mid-day tomorrow, I’ll have a fair degree of certainty that my IWM shares will stay on the path to assignment. Ideally, small cap stocks will come down a little more so I can get a better price for my new naked put and maybe even target a lower strike. For now, I’m considering the January or February $130 or $131 IWM strikes. I’ll probably enter a limit order in the morning and see how the day goes to decide if I want to lower my asking price.

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