Over two weeks ago, on the morning of July 13th (the same day I sold my last UCO naked put), I was looking at my TD Ameritrade (AMTD) account and was thinking that I still had more margin not in use. I figured I could sell some more longer-dated options, far out-of-the-money and not take much risk to bring in a few more dollars and increase my returns another percent or two for that account. Also, the way AMTD shows account balances depends on what the ask price is for short options. This always skews my true balance down for positions like UWM that have wide spreads on options that aren’t in the front month or two. Sometimes I’ll enter an order below the ask, but still somewhat high and see my account value increase. (This doesn’t change end of day values, just intraday.) It doesn’t really matter because the chance of it hitting is very low and if it does I’ll have a good chance of making a profit by expiration.
Well, on July 13th UCO was trading more than five dollars higher than it is today. So, with little to risk I figured what a 15% annualized return would be at the time if my order hit for another January 30 put. I entered the order, good until cancelled, and forgot about it. That is until this morning when I received an email that let me know, while UWM was trading at $$42.62 I sold one UWM January 2012 $30 naked put for $2.30 and received $219.25 after commissions. UWM made it as low as $42.08 this morning, so I didn’t make the trade at the low of the day, but not too far from it considering that so far today it made it back up to $44.30 briefly.
While I’m not on margin yet in this account, if all of my puts were assigned I would be by nearly $4,000 and that doesn’t even count the $17,000+ I have in bond ETFs. I’d dump the bonds in a heartbeat if assigned all of my low-strike options and stay long while selling far out-of -the-money covered calls. If any of the options in this account are assigned I’ll be getting in at much lower prices than today. This is why I’m not nervous about it. UWM would have to fall another 34.76% for me to take a loss on this trade. That’s equal to around 17% for the Russell 2000 index to fall. After already losing a few percentage points from its high of $52.16 in May, I don’t see UWM making it all the way down to $30 any time soon. If it does, we should see a good bounce soon after. If this trade works out for me, I’ll have a 16.3% annualized gain, better than the 15% I originally targeted thanks to the 16 days that have passed since I entered the order.
The ask for this option went up to $4.30 after my order hit. I went back in and entered another limit order for a client of mine at $2.80. That would give him better than a 20% annualized return if it hits and works out. I doubt it’ll hit unless we get another sudden downdraft in prices and someone panics. That’s what a lot of these high limit orders are for, catching someone on a fat finger trade or in a panic to buy protection. The majority of the time the orders don’t hit, but sometimes they do and it’s easy money. Since I’m fully invested now, I can be patient with any future orders and can use more of these long shot orders to ease my returns a little higher, with less risk.