As the market continues to edge higher my naked puts continue to move farther out of the money and drop substantially in value. Today I simply sorted my positions by ask price from lowest to highest to see what I should consider buying back and selling another contract farther out on the calendar (aka rolling). IWM beat out MDY December 145 put by about a nickel and since I’ve already opened a new leg on MDY without buying back my first put the best position to roll for me was IWM. After MDY the rest of my options are still at least $0.50 (not counting UCO that I sold yesterday for $0.25).
Since I wasn’t really concerned about my December option being assigned I started with opening the new contract before dumping the first. While IWM was trading at $77.01 I sold to open one IWM January $76 naked put for $2.01 and received $199.91 after commissions. Just under five minutes later IWM dropped down to $76.87 and I decided not to be foolish and bought to close my one IWM December 72 naked put for $0.11 and paid $11.71 with commissions.
Before this year (really even before this summer) I would’ve let the December option stay in place while I added risk (like I did on MDY since the probability of assignment is so low), but I’ve listened to what some of you have advised and learned from quick drops in prices that sometimes it’s better to spend $10-12 to cut the risk. With commissions so cheap at Interactive Brokers (IBKR) the cost of the transaction is negligible. Also since I can’t leave old options in place when I open a new contract in the IRAs I manage (since they eat up the required cash backing) I’ve started to get into the habit of it anyway.
By buying back short dated, cheap options I keep my potential margin levels down and leave the door open for myself when I find new buying (or put selling) opportunities. I still don’t think the likelihood of a correction greater than 10% is very high in the near-term, so using some leverage doesn’t feel like a big risk yet. The recent 4% drop for the SPX just opened the door for new highs. A 10% drop would probably do the same thing again.