Starting early yesterday morning, my whole day fell into disarray. My uncle (who has dementia) had a small stroke and his assisted living home needed me to take him to the hospital. My parents usually take care of him, but they were on their final day of a short vacation. I spent the entire day at the hospital with him until my cousin relieved me after dinner. I spent a few hours there today to catch my parents up on how he was yesterday compared to how he is today. He has recovered mostly already and should improve some more. Their presence allowed me to get home to work some more this afternoon.
Thankfully, I had some limit orders in place before the day started yesterday. I was able to make some trades for my clients and for me on the one-day dip and now that I’m writing this nearly 24 hours later, it’s great to see prices recovering already. While UWM was trading at $83.36, I sold two UWM July $70 naked puts for $3.40 each and received $679.29 after paying $0.71 in commission. The beauty of the market we have this year is the random volatility is back. Having a few days scattered in with 1% drops helps with limit orders placed in advance. If we can remain patient with our orders, 2014 should be a good year for option sellers.
When I place my limit order a day earlier, UWM was trading around $84.60, but was up big on the day. I expected a small retracement in the ETF’s price and a bump higher in the Vega (sensitivity to volatility), so I placed my limit order above the ask price at the time. Knowing how UWM fluctuates and how the option premiums bounce, I should’ve placed my limit order even higher. Still, I have a nice potential return with a wide margin for a cushion before I take a loss.
This trade puts me back into a position where I’d be on margin with 20% of my account if all of my puts were assigned. This allocation allows me to continue being patient with future trades. I only have one option expiring tomorrow. It’s on SPY and is less than $1.00 in-the-money. I can wait to see how SPY trades tomorrow before rolling it out further.
UWM Naked Put Risk/Reward Breakdown
- Potential profit: $679.29
- Potential return: 12.4%, 24.34% annualized
- Breakeven price: $66.60
- Downside protection: 20.10%
- Recent high: $88.03 on 1/22/14
- Cushion from recent high: 24.34%
- Expected support: $80.00, around the 100-day moving average, next could be down to $73.38 as a retest of the recent low (which happens to be close to where the 200-day moving average is ascending. I don’t expect anything worse than the lows seen at the end of last summer, around $64.00. A fall to these six-month lows would put me at a paper loss, but I don’t think it would be for long since it would mean small caps had retreated roughly 12% from their highs and should be due to recover by then.
- Position close goal/limit: I’ll don’t plan to take an assignment of these shares. If UWM falls below $64.00, it probably means something has fundamentally changed with the economy and I will have to consider closing for a loss early if I believe the economic threat is real. Assuming my theory is correct and small caps don’t enter a bear market before July expiration, I’d like to close this position by mid-June for $0.50 per contract. If I can get out for $0.70 before June, I will.