These trades were not an even swap and were not intended to be. I’ve written a couple of times recently about my plans to close my two FEZ February $40 puts. I had a chance to close them for $0.25 each and then FEZ fell below $40 at the beginning of the month. This price drop in the ETF pushed the option price to around $1.00 and I decided I’d continue risking an option assignment at the reduced price rather than pay out so much in time value for such a short period of time.
My patience paid off. This morning, while FEZ was trading at $41.25, I bought to close my two FEZ February $40 naked puts for $0.10 each and paid $21.54 including $1.54 in commission. The contracts only had a week and a half to go before expiration, but I am happy to cut the risk for only a few bucks. I still have two other FEZ $43 naked puts in place. This exposure gives me plenty of upside in the European ETF if prices continue to head back to towards their earlier highs.
Based on the overall price action in stocks for the past week or so, it seems the bulls are ready to run again. My portfolio was missing any mid-cap exposure, so I went back to MDY for an easy fill. While MDY was trading at $242.63, I sold one MDY June $245 naked put (in-the-money) for $10.60 and received $1059.63 after paying $0.37 in commission.
I didn’t want to go out as far as June, but the March premiums didn’t offer enough of a cushion for the risk. The annualized gain would’ve been bigger, so I did consider it briefly, but by selling in-the-money I was able to get much closer to the March $240 annualized return while giving my trade a better buffer before a loss. I checked on the June $240 strike too, but for only 1.2% more in downside risk reduction, I would have given up 2.3% in upside potential. Since I expect the year to end above where it is today, I figured I could push for a little better gain, but not in a stupid way that didn’t leave any room for more volatility.
The mistake I made was aiming too low. I didn’t have to rush into this order and could’ve aimed higher with my ask price. Just an hour an a half after I made the trade, the same contract had a bid/ask of $10.90/11.20. This would have been an easy order at $11.00 and possibly at $11.10 as MDY was catching some pace on its decent. At least I didn’t place a market order. MDY fell $0.41 from the time I placed my order to the time it was trigger.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $1059.63
- Potential return: 4.52%, 12.6% annualized
- Breakeven price: $234.40
- Downside protection: 3.39%
- Recent high: $247.36 on 1/22/14
- Cushion from recent high: 5.24%
- Expected support: $240 at the 20 and 50-day moving averages, then $236 at the 100-day moving average. $230 looks like very strong support if we see a retest of the recent lows. In addition to three days of support almost dead on $230, the 200-day moving average is ascending and should catch up to $230 soon.
- Position close goal/limit: I’ll take an assignment on these 100 shares if MDY doesn’t gain 1% in the next 18.6 weeks. Ideally, MDY won’t gain that ground too soon and I’ll be able to take a profit while the index doesn’t gain ground.