Ford (F) hasn’t quite behaved like I expected it to yet, but I still see some potential left in it or at least a good way to make money if it doesn’t sink much more. F fell as low as $14.41 at the beginning of February and I figured I’d be forced into taking a loss or buying it at expiration. Instead, the stock started to work its way higher and I saw another opportunity. Once it got above $15.50, I had two choices if I wanted to stay invested in the stock. I could hold on and take the assignment at the end of this week or I could roll my puts out to a later expiration and take a profit of a few dollars on the March puts. I took the later approach.
While F was trading at $15.54, I bought to close four F March $16 puts for $0.4775 each and sold four F May $16 puts for $0.8975 each. I received net $161.78 for the calendar trade after paying $6.22 in commission. Closing the March puts cost me $187.90 and gave me a realized profit of $17.61 on my first attempt on F. Compared to what I thought I might lose, any gain is a good thing. Now, I have much more upside potential, because the new May puts brought in $355.88. I also lowered my break-even point by rolling the puts. Although the share price tumbled hard at first, support has been strong in the low $15 range for the past month. I’ll be content to continue rolling these puts until F makes another run higher. As long as any move lower is slow, I should be able to pull a few dollars of profit each cycle while lowering my potential cost per share if ever assigned the shares early.
Even if F does not recover before the May expiration, I could make a 2.82% gain on the options without any stock price appreciation. Annualized, this little gain would add up to 16.64%. After my first trade on F in January, I was considering adding more puts on weakness followed by support, but I changed my mind and now just want to see this out as it is and not try to push more into a position that isn’t performing well. Then again, if F drops enough and I’m assigned shares, I’ll probably consider adding more with out-of-the-money puts to help lower my average cost per share.
F Naked Put Risk/Reward Breakdown
- Potential profit: $355.88
- Potential return: 8.89%, 34.79% annualized
- Breakeven price: $15.11
- Downside protection: 2.77%
- Recent high: $18.02 on 10/24/13
- Cushion from recent high: 16.15%
- Expected support: $15.00, then $14.41 (the February low, which happens to be exactly a 20% correction for Ford)
- Position close goal/limit: I’ll take an assignment on these 400 shares if F falls and stays below $15.00. If I can get out for as little as $0.15-0.20, I might close the position early, otherwise, I’ll try to roll it again in the final week of the contracts.
This was my last March option. It’s time to get out on the hunt for something new, especially if the Russia/Ukraine problems don’t have much influence on US stocks in the near-term. I’ll try to get another trade in this week and again next week to ease up my exposure. I’m still worried about the next 10% correction and want to keep some cash handy, but I can always use margin if I need to amp up my positions on a reversal.