Rolled My Leveraged Naked Puts

I had two different January leveraged ETF puts going into today that had limited upside potential.  The downside risk was still there in case a black swan event hit.  So, I thought I should roll these out and up with diagonal spreads to increase my potential profit in the coming months.  The underlying ETFs were SSO and UWM.  SSO is the 2 x S&P 500 ETF I like to use when I think the market has limited downside and UWM is the 2 x Russell 2000 ETF I like to use.  I’m not willing to put my full account in these leveraged ETFs unless a clear rebound has just started.  At other times during a bull market, they provide a little better return while providing protection from shallow declines at the cost of a bigger loss on larger declines.

I tried to roll my SSO puts yesterday, but wasn’t too generous with my asking price since I thought we were due for a down day today or tomorrow.  Stocks didn’t fall much today, but enough that I made the trade a couple of cents higher than I tried for yesterday.  While I’m happy I did better than I would’ve yesterday, if I had waited a few hours longer, I’d have made even more on one of the short-lived dips later in the day.  While SSO was trading at $97.78, I bought-to-close two SSO January $85 naked puts for $0.50 each and sold-to-open two SSO March $91 naked puts for $3.05 each.  I received $506.68 after paying $3.32 in total commission for the diagonal spread.

My January SSO puts had only 0.58% of upside left in them.  That only amounts to 5.2% annualized.  I chose the $91 strike puts because I wanted at least a 10% cushion and as much over a 10% annualized return as possible.  I can earn 3.34% on the new March SSO puts, which comes out to 11.7% annualized.  It’s not going to be a big winner, but I’m not sure stocks will go up more than a few percent by expiration, if any at all.  I get to earn a decent return while not losing on a 5% drop in the S&P 500.

I wasn’t planning to roll my UWM puts today, but with nearly a 6% buffer on my January DIS puts and more than 6% cushion on my MDY puts that expire next week, I figured I had some room to handle the downside risk.  I might close my MDY put this week since the premium is so cheap now. (I have an order for $0.05 that hasn’t hit yet.)  On the other hand, I might save the $10 (the cost if I raised my bid to $0.10 to make it hit) and let it expire worthless and not re-write it.  I’ll be pulling $20k+ out of my account in a few weeks for my annual rebalance to start the year with $100k in this account.  Getting my MDY position out of my allocation would leave me closer to 100% invested without much margin risk.  If mid-cap stocks drop 6.5% over the next eight, I might consider taking the assignment, selling covered calls and riding the margin until I can exit with a profit, which I don’t think would take long at all.

Anyway, I did decide to raise my strike on UWM and pushed the expiration out to April to help increase the premium over what January offered.  While UWM was trading at $79.73, I bought-to-close two UWM January $65 naked puts for $0.45 each and sold-to-open two UWM April $72 naked puts for $4.05 each.  I received $716.92 after paying $3.32 in commission.  Small caps tend to do well in the first part of the year, but I still wanted to leave a solid buffer for any mini-correction before expiration.  My January UWM puts only had 0.69% in upside potential (6.2% annualized).  The April UWM puts can earn almost 6% (16.5% annualized) with more than 7% for a cushion in Russell 2000 movement.  I needed a bigger buffer before a loss on the UWM puts since small caps tend to move quicker than large caps in a correction.  Since small cap stocks have outperformed large caps throughout 2013, I expect their retracement to be bigger too.

Both the S&P 500 and the Russell 2000 could drop 10-12% over the next few months and I wouldn’t be shocked.  I will be surprised if the slide turns into anything more than that.  Based on that thought process, I recognize that it’s possible to lose on both of these trades in the near-term, but believe any dip is going to be a buying opportunity and these trades will force my hand into buying on the dip, if the timing works for expiration.

SSO Naked Put Risk/Reward Breakdown

• Potential profit: $608.33
• Potential return: 3.34%, 11.7% annualized
• Breakeven price: $87.96
• Downside protection: 10.04%
• Recent high: $98.52 on 11/29/13
• Cushion from recent high: 10.72%
• Expected support: $95 – the intraday for December so far, or $91.30 – the low of November, the 50-day moving average that’s around $92.50 could provide support before the November lows are retested.
• Position close goal/limit: I’ll roll it early for a good profit if I can (like I did above), but might take the assignment on an extended decline.

UWM Naked Put Risk/Reward Breakdown

• Potential profit: $808.45
• Potential return: 5.95%, 16.5% annualized
• Breakeven price: $67.96
• Downside protection: 14.75%
• Recent high: $82.97 on 11/29/13
• Cushion from recent high: 18.09%
• Expected support: $77.52 – December low so far, $73.21 – November low and close to the 100-day moving average, $67.97 – if this October low doesn’t hold, I might have to exit the position.
• Position close goal/limit: I’ll roll it early for a good profit if I can, but will be willing to take an assignment and ride the risk out while selling covered calls as long as my other positions don’t have me in a deep hole at the same time.