I expected to come in with at least a few trades to kick the week off on Monday and Tuesday, but stayed patient in this account and watched the fluctuations. The two first trades I thought I was going to make were on TBT and DSX, but neither of the naked puts ended up being assigned. (Interesting though, one out of three of my clients who I had on the same naked puts was assigned his shares, the other three of us weren’t.) TBT fell sharper than I expected, but then rallied very nicely like I predicted. Too bad I didn’t get the assignment there. I probably would’ve sold today for a nice profit, but at least I sold the other naked puts last week, so I’m covered for my exposure there anyway.
My DSX naked puts weren’t assigned even though they finished in the money a little too. This also meant my DSX covered calls weren’t assigned either, so I still have 300 shares long. I tried selling covered calls, but it kept dropping faster than I could chase it and my limit orders never hit. Now it’s so cheap I’m back to the wait and see mode and could end up selling my 300 shares for a bigger loss by year’s end.
I’ve been thinking that the markets are starting to look a little weary with multiple areas of resistance showing up in the charts and didn’t want to add new exposure quite yet. I don’t mind missing a few upside points to prevent getting hit with another sell-off. I spent some time reviewing my account and thinking of different scenarios that could play out. I decided I should take some early profits from the 100 shares I’m long on UWM and so I sold a call. While UWM was trading at $34.33 I sold one UWM April $35 covered call for $4.40 and received $439.27 after commissions.
I’m still short two UWM January 30 puts. I think they’ll finish out of the money fairly easily. I also have one January $35 put which might finish out of the money, but I don’t mind taking the assignment if it doesn’t. I sold that put for $6.00, so I have a great cushion still and the call premiums are good still as you can see from today’s trade. I also have three January $40 puts and one January $45 put. I’m close to a paper profit on the latter two strikes and have plenty of upside if small caps rally. With this much exposure to small caps I deemed it wise to reduce my cost per share a little more and won’t mind if the calls are assigned at $35. If they are, it will mean my other 4-500 shares of UWM are moving higher too. I plan to sell covered calls on the new shares once they are assigned and will decide at the time if I sell farther out of the money calls or try to lock in a higher probability chance of profit with lower strikes.
This trade stands to make a 14.75% return if exercised. That will be an annualized return of 43.57% if it works out. If UWM finishes April at the same price as today, I’ll still gain 12.79%. That’s a good year’s worth of gains in one third of the time. This nice upside potential is why I didn’t wait for any better rally. It’s a win-win for me. If assigned I’ll finish with a good realized gain and will have a higher starting point for the rest of my shares to sell covered calls on. Also, if small caps have gained 7+% by April (roughly the equivalent of a 14.75% gain in UWM) I think we’ll see some profit taking soon thereafter again. By selling this call I’m forcing myself to exit the position on such a rally.
Also worth mentioning – have y’all seen VXX lately? It’s under $34 as of this afternoon and falling still. Apparently my December $33 naked call was a smart trade. Not hedging and then buying it back for close to break-even wasn’t as smart. I feel vindicated now that it’s this low and don’t regret exiting when I did. I wanted to reduce the volatility in my account and that trade accomplished it. I’ll get back into VXX again next year, but will either wait for a better spike than I did this year and/or will hedge my trade by buying another call further out of the money. I still think VXX is easy money (due to its flaws) when managed properly. Sometimes it just takes a little longer than expected to work out.