After posting the Russell 2000 chart this past weekend I thought this week would start off with more of a decline, but so far the 50 day moving average hasn’t even been touched yet and small caps have moved higher again, albeit not to last week’s highs so far. Sticking with my theme of not wanting to be left behind by the markets again this year, but still fearful of some sort of correction soon, I decided I should add some more small-cap exposure with out of the money puts. UWM (an ETF that tries to produce returns of twice the daily return of the Russell 2000 index) has had fairly rich premiums for the past month which has allowed for a good sized correction before the seller (typically my role) would be forced take a loss by expiration.
Although premiums have dropped a little as time has passed and some uncertainty has become clearer, the premiums are still pretty good. While UWM was trading at $43.66 I sold one UWM January 2012 $40 naked put for $7.50 and received $748.99 after commissions. This trade gives me 23.1% upside potential and a cushion of 25.5% before I take a loss on the position. UWM can even fall 8.34% and I’ll still end up with a full profit. I still think small caps (and therefore UWM) should correct a little from today’s levels, but I’ve been wrong about the market’s demise too many times in the past to sit around and wish. I don’t expect any correction to be more than 10% this year, so even when using a less that precise “ultra” ETF I don’t expect it to lose more than 22-23% and that’s at the low of the cycle. By the time January 2012 options expiration rolls around small caps should be at least even from where they are now, if not higher.
I thought about aiming for a higher strike, but didn’t feel that was necessary until we get more of a correction than we already got last week. This trade gives me exposure on UWM at the $35, $40 and $45 strikes all the way out for another 51 1/2 weeks. I have some more limit orders in place to hit on another dip within the next couple of weeks too. Even if all of my puts are assigned early I still have cash to back them for now. That’ll be changing over the coming weeks, but I’m trying to hold onto some buying power for a bit longer before I overextend myself again. If the wash rule wasn’t keeping me out of UCO I’d be ready to dive in again. I saw it catch support as of yesterday and this morning. The March $10 and $11 puts and the July $10 and $11 strike puts all looked like they’d be worth some consideration.