This morning’s positive jobs data caught most investors off guard. Not only did it beat forecasts by 10,000, the previous month’s number was revised 50,000 higher. Much of my concern for the market’s direction came from my view that if the jobs data is weakening, the economy will follow. Based on today’s employment data and the recent positive housing data, I’m more bullish than I was last week. I’m still somewhat cautious due to the run we’ve already seen in stocks, but I’m back to thinking any dip will be relatively shallow, maybe 5-6%, not 10% or greater as I was starting to fear.
Based on my outlook, I added more exposure and to get more bang for the buck, I sold naked puts on leveraged ETFs. While UWM was trading at $57.49, I sold two UWM July $52 naked puts for $1.80 each and received $359.26 after paying $0.74 in commission. As expected, the market gapped higher at the open and premiums on puts tanked. I tried to get in a quick order on this leveraged small-cap ETF at $0.30 below yesterday’s last trade, but it didn’t hit. Every minute I didn’t get the order in, UWM climbed higher. I started dropping my limit order by $0.10 to 0.20 every few minutes until I was able to get a taker. I’m happy with this trade, even at the reduced premium from yesterday’s inflated amount. My goal was to find a trade that gave me at least 3% upside potential before the midpoint of the year (6/30/13) and at least 5% of downside protection. I beat both of those goals with this trade, see below. The cushion I have isn’t exactly straightforward. Since UWM is a 2x leveraged ETF, the losses come twice as fast. The 12.76% downside protection I have is more like 6.35% of downside for the Russell 2000 Index. That’s a good range to start buying in again on a dip, assuming nothing major changes to the macroeconomic inputs.
UWM Naked Put Breakdown
- Potential profit: $359.26
- Potential return: 3.57%, 16.6% annualized
- Downside protection: 12.76%
- Breakeven price: $50.20
- Position close goal/limit: Plan to stick with it through expiration, but could roll higher on further small-cap strength
I started reviewing my other positions after this trade hit. My May SPY put was dirt cheap so I closed it to open up some cash for other positions that had more upside potential. While SPY was trading at $161.76, I bought to close one SPY May $155 naked put for $0.17 and paid $18.07 with commission. Like the trades I made yesterday, there was little reason to keep this exposure in place for such a small potential reward. I don’t think SPY will be back below $155 anytime soon, but for a few bucks, removing that risk completely is a reasonable trade off.
I might have considered leaving the SPY position for another week if I wasn’t itching to add more S&P 500 exposure on the bullish news. I mentioned yesterday that the S&P 500 was having a hard time passing 1,600. It opened above 1,609 this morning and didn’t look back all day. I missed the earliest opportunity to write (sell) new puts, but that didn’t stop me from making a trade later in the morning. The trouble with SPY puts was that it was a day for the bulls and premiums weren’t trading for much of a return versus the risk. The difference between buying SPY and having unlimited upside potential wasn’t much different than selling at-the-money puts. I didn’t want to buy SPY while it was up more than 1% on the day. That pushed me to SSO, the leveraged ETF, again.
While SSO was trading at $77.72, I sold two SSO June $72 naked puts for $1.11 each and received $220.46 after paying $1.54 in commission. I wasn’t pushing for as big of a gain on this trade. This was more of an asset allocation trade for me. I wanted to replace the SPY put I just closed, but the SPY puts for June and July weren’t worth it. SSO filled my need and did it with a better risk/reward scenario. I checked out the SPY puts when my SSO order hit. To get a 10.8% annualized return with a SPY naked put, I would’ve only had 2.57% downside protection. Even when I cut my SSO put’s cushion in two (because it’s going to fall twice as fast as a leveraged ETF), I still have more room for error before I lose money. It’s not completely an apples to apples comparison. If the S&P 500 falls too much, my SSO trade will be worse off than a SPY trade would’ve been. Since I don’t think SPY will fall more than 5% in the next seven weeks, this trade seemed to be the better choice between the two contracts I was comparing, unless the S&P 500 falls more than 6.2%. Then again, even an 8-10% correction wouldn’t cripple me since the covered calls would be inviting on SSO, especially if a reversal started.
SSO Naked Put Breakdown
- Potential profit: $220.46
- Potential return: 1.53%, 11.1% annualized
- Downside protection: 8.78%
- Breakeven price: $70.90
- Position close goal/limit: Plan to stick with it through expiration, but could roll higher on further large-cap strength