I’m a day early on my options expiration post because I closed out my remaining September options today and figured I could wrap up my commentary sooner than later too. I might come back in to make another trade tomorrow, but doubt it based on the trades I made today and everything else I have on my schedule for the day.
I had one Disney (DIS) September $65.00 naked put set to expire worthless tomorrow. Yesterday afternoon, I entered a limit order to roll it out to November. I didn’t want to leave the September put in place in case something really weird happened. However, DIS looked like it was getting ahead of itself and I expected a slight drop to its 10-day simple moving average (sma) or maybe a little lower. To account for that, I entered my calendar spread well above the bid/ask. Before the market opened this morning, I heard DIS was downgraded and the pre-market prices showed it would open down $0.80. I headed to my desk and canceled the order I had in place to see how it acted in the first few minutes of trading.
DIS opened lower, as expected, but seemed to find its footing so I re-entered the order below my previous price and while DIS was trading at $66.29, I bought to close one DIS September $65 naked put for $0.07 and sold to open one DIS November $65 naked put for $1.70. I received 161.21 after paying $1.79 in commission for the two transactions. A few hours later, I saw that I should’ve left my original order in place for $1.90 since DIS resumed its decline and the November contract jumped in price while the September contract didn’t change much. Instead of fretting about it, I did the next best thing to getting it right on the first try. I entered a new order. While DIS was trading at $65.53, I sold one DIS November $65 naked put for $2.01 and received $200.38 after paying $0.62 in commission. My thought process was that if I liked the put at $1.70, I should love it at $2.01. DIS was falling because of a downgrade after they announced they were pushing a Pixar movie release out from 2014 to 2015. That’ll hit their earnings next year, but DIS is not a one-movie shop. They will have a string of releases over the next decade and beyond that will bring in piles of cash. I might be forced into buying and holding DIS for a while, but expect the bottom to be fairly shallow and I won’t have a hard time making a profit on these two puts.
DIS Naked Put Risk/Reward Breakdown (separated in some bullets since I made two different trades)
- Potential profit: $169.00 and $200.38 ($369.38 total)
- Potential return: 2.67%, 16.5% annualized and 3.18%, 19.9% annualized
- Breakeven price: $63.15 when combined
- Downside protection: 4.49% and 4.97%
- Recent high: $67.65 on 9/16/13
- Cushion from recent high: 6.42% and 6.88% (6.65% combined)
- Expected support: $65.00, then $63.00 at a rising 20-day sma and the 38.2% Fibonacci line
- Position close goal/limit: Plan to stick with it through expiration and I’m willing take assignment for longer-term hold coupled with covered calls. If DIS falls deep enough and I see a rebound starting, I’ll buy more.
The opposite happened with MDY. I had one MDY September $220 naked put scheduled to expire worthless tomorrow and wanted to catch any more growth after Bernanke’s “non-tapering” speech yesterday. A little more than a week ago, I entered an order to roll my September $220 naked put to a December $220 strike. I thought MDY would retreat a little or the September premium would drop quicker than the December premium. Neither happened and I left a couple of hundred bucks on the table. As MDY ascended, I sat motionless. Finally, I acted today. While MDY was trading at $229.21, I bought to close one MDY September $220 put for $0.05 and at the same time sold to open one MDY December $225 naked put for $6.30. I received $624.41 after paying $0.59 in commission. Since MDY was more than 4% out-of-the-money from the $220 strike, I felt I needed to raise my strike. I wanted to keep a solid cushion before taking a loss, but also wanted a decent return. I don’t expect any upcoming retreat in stock prices to be too severe, but with the returns I’ve already made, I don’t want to get too risky at this point either.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $629.60
- Potential return: 2.88%, 11.2% annualized
- Breakeven price: $218.70
- Downside protection: 4.58%
- Recent high: $229.87 (today)
- Cushion from recent high: 4.86%
- Expected support: $225.00, then $223.00 where MDY gapped higher last week and then found support the following three days. $219.00 could come into play on a better retracement. That was the area of resistance in late September and would be close to 5% below today’s all-time high. Notice that this bottom level is close to my cost per share if assigned. That isn’t by coincidence.
- Position close goal/limit: Plan to stick with it through expiration and I’m willing take assignment for longer-term hold coupled with covered calls.
I didn’t need to make this trade and wouldn’t have done it if I wasn’t writing this blog and wanted to close out all September options today. While SSO was trading at $89.03, I bought to close two SSO September $75 naked puts for $0.02 each and paid $5.13 including the $1.13 in commission. I already have two SSO December $78 and two SSO December $80 puts I’m short and saw no reason to add any more for now.