As I mentioned last week, I’m underinvested. The first step I took this week to remedy that was to move more funds to the international ETF I’ve been using lately, FEZ. FEZ attempts to track the Euro STOXX 50 Index, which happens to be heavily weighted in the Financial Services sector (26.72%, according to Yahoo! Finance). The Healthcare and Utilities sectors take another 10% each to give it a little more balance, but with a 3-year beta of 1.3, it’s not exactly a low risk trade.
I have two FEZ February $40 naked puts already and they’ve gotten fairly cheap, but I opted not to roll them yet. I simply added new exposure on the same ETF at a higher strike and farther out on the calendar. While FEZ was trading at $41.98, down $0.19 from its morning high, I sold two FEZ May $43 naked puts for $2.20 each and received $438.45 after paying $1.55 in commission. FEZ continued down to a low of $41.81 an hour later, which means I might have been able to get another nickel or two per contract. I sold my puts above where the midpoint of the bid/ask was when I placed the order, so I’m content with the way it worked, especially since the ETF ended the day back up at $42.05.
I debated closing my February puts, but don’t see the risk (5.29% cushion before a loss) as too big yet to give up the 0.61% (6.6% annualized) I can gain by waiting longer. I don’t plan to let run all of the way to expiration, but want to pay less than a quarter to close these two contracts. I wouldn’t have left the risk on the table if I was already fully invested. I also thought about selling the at-the-money strikes at $42 instead of selling in-the-money at $43, but the risk/reward difference wasn’t worth the very slightly reduced risk. To be more exact, I gave up 1.07% more risk to gain the potential of an extra 1.3%, 4.0% annualized profit. Looking back, that’s closer than I thought for the risk/reward handoff. I think I misread my spreadsheet when I was comparing the two earlier. Still, I think I made the right decision. My purchase price (if assigned) will be 50 cents higher with the $43 strike and the chance for a 31% bigger return (5.37% vs 4.07%) balances in favor of higher risk option my mind.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $438.45
- Potential return: 5.37%, 16.6% annualized
- Breakeven price: $40.81
- Downside protection: 2.79%
- Recent high: $42.41 on 12/31/13
- Cushion from recent high: 3.78%
- Expected support: $41.75, around 10-day moving average, not terribly confident about this level. $40.81 (not coincidentally, my cost if assigned) looks like very strong support from the low hit on January 2. The 50-day moving average is right there too and should help with support. The lowest I think FEZ will move in the near-term (although I don’t think it will go this low) is $39.34. This is the low from December 13, which marks the lowest point from the past few months and is 7.2% below the recent high.
- Position close goal/limit: I’ll take an assignment on these 200 shares if FEZ doesn’t climb 2.43% by expiration. Since I don’t expect FEZ to fall more than 7.2% from its high, I don’t mind owning it and catching the rebound from my discounted purchase price.