My account is at a high for the year and has some more room to move higher before next week’s options expiration. I have less than 1.5% to gain in my account over the next 5 2/3 months to hit my full year target. As I’ve been writing about for months, I’ve had a lot riding on oil. I was expecting another run above $100 in WTI crude, but didn’t know if it would be any time soon. Luckily, it did hit sooner than later and I’m profiting from it. I don’t expect this rally to last too long and want to be sure I get out of my July $33 covered calls while UCO is above $33.00. I have more than $2.00 for a cushion right now, but know that can vanish in an instant. The calls still have $0.15 in time value and with six calls short in my account, that’s worth $90 over the next six days. If I could get out tomorrow with only $0.10 in time value, I’d be happy. I don’t have the limit order in yet, but will probably enter it by morning. If I see oil tanking quickly, I’ll dump my 600 shares and then try to catch a better price to exit the calls on the way down. There’s a decent risk in that move, but I wouldn’t let it run more than a few hours.
Since I’m so close to reaching my full year goal, I thought I should close some options early that were set to expire next week. When I looked more closely, I decided I didn’t need to completely exit all of these positions. I just needed to make adjustments to move forward. I rolled one, closed one and let one run while opening its replacement a week early.
My IWM July $95 naked puts are nearly worthless at a bid/ask of $.03/.04. I was planning to roll them out to September, but decided not to spend $13.00 to close them ($0.4 x 300 + $1). The probability of the Russell 2000 dropping 7% in the next six days is very low and I decided to take the tiny risk to save a few bucks. I’m confident enough in small caps not plummeting in the next few months that I sold new naked puts today at a higher strike before the July puts expire. While IWM was trading at $102.21, I sold three IWM July $100 naked puts for $2.48 each and received $742.19 after paying $1.81 in commission. I chose this strike to give myself a little breathing room on any correction, but needed to stay somewhat close to the money to keep my return worth the trade. It would’ve hurt my annualized return if I had gone any farther out than September.
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $742.19
- Potential return: 2.54%, 12.3% annualized
- Breakeven price: $97.53
- Downside protection: 4.58%
- Recent high: $102.59 (hit after my trade today)
- Cushion from recent high: 4.94%
- Expected support: $100.00, then $95 at rising 100-day moving average or $94 at the previous intraday low in June
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold. I like small caps for the next year and any small dip should be a buying opportunity.
My Disney (DIS) July puts weren’t as far out of the money and so they weren’t as cheap. I didn’t want to risk a reversal in DIS, so I took my single July put and rolled it out to September. While DIS was trading at $66.05, I bought to close one DIS July $65 naked put for $0.37 and at the same time, I sold one DIS September $65 naked put for $2.09 and received net $169.56 after paying $2.44 in commission for the calendar spread. I chose this strike because the return was good for my goals. The $67.50 strike might have worked if the lows are in for DIS, but I didn’t need to take the additional risk. The $62.50 strike didn’t provide enough of a return to make the risk worth the trade. The September expiration fit my normal goal of aiming one and half to two and half months out. That’s the sweet spot for my trades to get a decent return while getting quicker time value decay and lowering my breakeven price if assigned.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $207.78 (doesn’t include cost to close previous put, that was it’s own trade I reduced my profit on)
- Potential return: 3.30%, 16.5% annualized
- Breakeven price: $62.92
- Downside protection: 4.87%
- Recent high: $67.89 (on May 16, 2013)
- Cushion from recent high: %7.33
- Expected support: Above $61.82 (low on June 20 and June 21, 2013) or maybe $62.58 (low on July 3, 2013)
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold. I might add another put on a dip.
I almost missed closing my July T naked puts at break even this morning, but after faltering mid-day, “Ma Bell” came back to let me out unscathed. While T was trading at $35.91, I bought to close three T July $37 naked puts for $1.11 each and paid $334.16 including $1.16 in commission. This trade left only $.02 of time value on the table and gave me a realized gain of $0.67. With rising interest rates (before today at least), T’s dividend gives it support at a slightly lower price. It’s not expensive where it is, but I think I could do better allocating my cash elsewhere or at least waiting for another dip on the phone company. The downside is limited, but the upside is too. Don’t be surprised if you see me back in with T naked puts at a lower strike in the coming weeks. However, I might add more to my DIS position before selling T puts again.
I don’t have many regrets when I trade because I like to think that I make rational decisions based on the information I have at the time. I don’t expect every trade to work out for me. I do have a small regret right now. I should’ve jumped in deeper more quickly this week. I got behind on Friday when my modem died and wasted time getting a new one to work only to find it was my router and was an easy fix. Live and learn. The reversal in sentiment was easy to see, but since I had gains every day in UCO, I let that carry me. Looking back, I realize that I could’ve made more by moving on new trades earlier. Missing a few days of gains didn’t blow my year by any measure, but every missed opportunity can be a learning opportunity.