I entered a limit order on FEZ naked puts two days ago in the hopes FEZ would take one more step lower before recovering. FEZ started to climb soon after I entered the order and I thought my chances weren’t great of getting the trade. I opted not to chase the trade, but remained patient and left the order in place. A little more than an hour into today’s trading session, my limit order hit. While FEZ was trading at $39.91, I sold two FEZ February $40 naked puts for $1.75 each and received $348.46 after paying $1.541 in commission.
I didn’t have any international exposure before this trade. Now I have about 6.6% allocated to European stocks. I thought that buying into this ETF with a cost per share more than 7% below the recent high if assigned would be a good longer-term move if it doesn’t pay off by February.
FEZ has beta of 1.35, so it does have decent risk and that’s why the premiums are so good on it. After a strong run off of its July lows, FEZ retreated about 40% before launching an even stronger rally that ended a couple of weeks ago. If this retreat gives back 40% of its gains again, FEZ will find support well before my break-even price. This time could be more severe and FEZ could give back 50% of its recent gains. A decline this much would send FEZ within a few cents of my break-even point. My true risk starts after this point and I could lose a few hundred dollars if FEZ falls all of the way down to its 200-day moving average, near $36.00. Worse things have happened while investing, so I won’t get worked up about it until Europe has much more trouble.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $348.46
- Potential return: 4.55%, 15.4% annualized
- Breakeven price: $38.26
- Downside protection: 4.14%
- Recent high: $41.29 on 10/22/13
- Cushion from recent high: 7.34%
- Expected support: $39.75, based on trend line of higher lows – close to where it is while I right this. The next support is around $39.00 at the resistance area seen in September and early October, which coincides with the 61.8% Fibonacci line. The 38.2% Fibonacci line is around $37.50, which coincides with the resistance FEZ hit in mid-September. Worst case, I don’t think FEZ will fall below $36.61, a 76.4% retracement of the FEZ rally that started after the August 30 low.
- Position close goal/limit: If I can’t roll it early for a good profit, I plan to stick with it through expiration and take assignment for long-term hold. This is less than an $8,000 exposure. If FEZ drops 20%, I’ll only be down a little more than $1,000 and will have huge upside potential from there.