Sometimes patience pays off and sometimes it causes you to miss a trade. I was looking at Ford ($F) last week when I saw it come off its lows and move above its 10 and 20-day moving averages. I thought it might see resistance at its 200-day moving average, but it didn’t and I realized I missed a good opportunity earlier. This weekend’s edition of Barron’s had a positive mention on F and the stock responded today with a gap higher.
I knew better than to jump in at the open with an order since stocks tend to fade lower after opening higher post-bullish articles like this. It looks like I wasn’t quite patient enough. While F was trading at $16.32, I sold four March $16 naked put for $0.52 each and received $205.51 after paying $2.49 in commission. Ford fell another $0.12 before I started writing this and the puts went up to $0.58. My original order was going to be for $0.55 and I changed it when I reasoned that $12 ($0.03 x 400) wouldn’t make or break my year. I still have a good cushion built in to the trade and like the annualized gain potential that I have.
This is a partial trade for what I’m willing to go up to for Ford. I won’t chase it too deep, but if I think it looks to be finding support around $15.10 again, I might add to it. If it falls below $15.10, I might wait until I’m assigned shares to add any more puts, but I’ll really have to decide that if/when the time comes. Owning 400 shares with a cost of $14.49 isn’t such a big risk in my view. F’s trailing P/E ratio is 10.77 and its forward P/E is 9.37 with a PEG of 0.79. If they can simply meet expectations, I think F will easily move above $17, if not $18 by the end of the summer. We’ll get our next look at earnings at the end of this month.
I considered pushing the expiration date out to April instead of the March puts I sold. I stuck with March because I expect more volatility in the near-term than after the March expiration. If I’m right, the time value will melt quicker with the closer expiration and I’ll be able to adjust my positions sooner at a lower exit price. If I’m wrong and F stays somewhat flat, the same benefit applies. The April contracts were only $0.11-0.12 more than the March contracts, which made the March contracts a much better annualized return.
I briefly thought about selling the $17 strike puts, but only if I coupled it with some $14-15 strike long puts (a vertical spread) and I might regret that I didn’t. However, but cutting my number of contracts to only four, I feel my risk is limited and I’ll try to make a better return. I don’t think it’ll happen, but if F falls back to its one-year low, just above $12, I’ll have a paper loss of about $1,300 and will expect a strong comeback from there. Valuation and F’s dividend should keep it from falling any further.
F Naked Put Risk/Reward Breakdown
- Potential profit: $205.51
- Potential return: 3.32%, 17.4% annualized
- Breakeven price: $15.49
- Downside protection: 5.46%
- Recent high: $18.02 on 10/24/13
- Cushion from recent high: 14.16%
- Expected support: $16.00, then 15.75, 15.50 and $15.10
- Position close goal/limit: I’ll take an assignment on these 400 shares if F falls and stays below $16.00. I’ll consider adding more puts at the $15 or $16 strike if I see support forming.