I was all about being patient this week, until late this afternoon. I still haven’t done much, but did make a small trade today. I was waiting to see how low the markets were going to trip before finding some footing and it looks like the fall has slowed today, if not found somewhat secure footing. I’m still being cautious and went back to UWM which is still offering good premiums for its far out-of-the-money (OTM) puts.
While UWM was trading at $43.57 I sold one UWM January 2012 $30 naked put for $3.40 and received $339.29 after commissions. I actually started off trying to get it for $3.80, but UWM kept climbing and I decided to lower my asking price to get the order in. I am working up a decent exposure to this small cap ETF (almost 19% of my account).
This trade gives me a potential annualized return of 14.9% (12.8% not annualized) and I have downside protection down to $26.61 before I take a loss on it. That’s a possible 38.93% drop without losing a penny. I’m estimating that’d be a drop of about 17% in the Russell 2000 from here and we’re already down a few percent from the small cap highs. I can even handle a 31.15% drop in UWM and I’ll still end up with a full profit. If I was using the intraday high for UWM it would have to be a drop of more than 45.47% before I lost anything. I don’t see that happening without me wanting to buy in around there anyway.
It’s not a crazy big potential gain, but I have a very big cushion and since I’m buying on potential margin I have a larger ROI possible. I might add to another position tomorrow, but could give it another day or two so I don’t dig a hole on a dead cat bounce.
I thought about selling my long SSO March 51 put this morning, but didn’t. I might end up regretting that. My biggest loser in this snap is AFL so far. AFLAC has a lot of business in Japan and I’m sure that’s weighing on them big. I don’t think now is the time to jump ship from it though. It came up almost $3 from its low of the morning. We might start to find a floor for it soon, but I can imagine it’ll be a rocky road for the insurer for a while as it has to deal with making payouts and losing income.