Sold IWM Naked Put for March

My account was void of any index funds and I was looking for another individual stock to sell an option on, but felt I had been waiting too long and opted to come back to the easy trade on an index ETF while I continue to look for individual stocks. QQQ and IWM are usually the best for option premiums thanks to their higher volatility (usually) over S&P 500 ETFs. Since I already have options on AAPL, ADI, and NFLX, I decided to delay selling a new naked put on QQQ and focused on IWM.

While IWM was trading at $159.15, I sold one IWM March $159 naked put for $3.20 and received $319.32 after paying $0.68 in commission. While I usually like to sell farther out of the money, I opted to sell this contract at the money for a few reasons. First, my other options are farther out of the money already and have their own cushion from a loss, so I figured I had room to take more of a risk. Second, I like the risk reward for this contract. IWM can drop another 2.10% before I lose any money and if it stays above $159, I’ll make 2.05% (14.21% annualized).

Lastly, I don’t think small-cap stocks will fall more than 5% in a near-term correction and should bounce back quickly if they do drop that far. IWM was trading at $159.80 when I placed my limit order yesterday and fell as low as $158.40 before recovering. If assigned, my cost per share will be $155.81, 2.8% below yesterday’s intraday high. I expect support to surface at the 20-day moving average ($155.88 as of today) and/or the trend line of higher highs that’s ascending still and is close to $156.00 today. A price decline to $156 would be 2.88% below today’s intraday high, which happens to be an all-time high also.

Until the current bull market shows signs of weakness, it’s hard to avoid pushing for a little extra return with higher strikes. I’ve thought stock prices had risen too much even before the beginning of the year, but with the tax breaks, we could push much higher into a nice size bubble before it pops. I think small caps will go along for the ride without an insane amount of downside risk.

I still have $30,557 in cash and not being used to back any option positions, which is yet another reason to push for a higher strike today than I usually would. My only other limit order in place after today is to buy UUP puts. UUP tracks the US dollar and it appears we’ll have further weakness in the months to come. I’ll give more of my reasoning on the trade if my limit order hits.

« « Options Expiration – January 2018 - | - Option Trades on UUP and TLT » »

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