I wrote recently that I had a limit order in place to close my far out-of-the-money UWM April $72 puts. Well, the order expired before I found a taker on the other side of the trade. By then, I decided UWM wasn’t worth closing for 10 cents and changed my order to close if I could buy it back for only $0.05. I only have this order in for the day today, because I don’t expect UWM to fall 18% and cost me a surprise assignment. For UWM to fall that much, the Russell 2000 would have to drop roughly 9% in the next two weeks and two days. I don’t see it happening without a bounce that could turn any assignment into a bigger profit for me.
Instead, I decided to go ahead and open more UWM exposure. In addition to UWM April puts, I am also short two UWM July $70 puts that are 20% out-of-the-money (not counting the $2 in time value still in the options). I don’t think they’ll be assigned, but there’s certainly a chance for the small-cap index to fall 10% in the next few months. To stick to the same small-cap theme, I thought I should sell more UWM puts to replace the two I expect to finish worthless at this month’s expiration. While UWM was trading at $87.83, I sold two UWM July $77 naked puts for $3.20 each and received $640.08 after getting a commission rebate of $0.08.
I didn’t actually expect the order to hit right away. The bid/ask was $2.70/3.50 when I entered the trade and I thought UWM would have to drop some more before the order was triggered. I sold this strike because I wanted at least a 20% buffer from a loss based on the recent high for UWM. The $77 strike was the highest strike to give this opportunity. I checked the $76 strike to see how much difference it would make on my potential return and decided the extra 0.65% cushion I’d gain wasn’t worth giving up 0.5% in possible gains.
Since I decided to risk leaving my cheap April UWM puts in place, I opted to close out my single SPY put. While SPY was trading at $188.31, I bought to close one SPY April $186 put for $0.88 and paid $89.09 including $1.09 in commission. Even though the underlying ETF on the UWM options is a leveraged ETF, I figured the SPY puts had a greater risk because they are closer-to-the-money. The S&P 500 would only have to fall 1.69% for me to lose on my SPY put and that can easily happen within a day or two. When I say “lose”, I mean based on the cost to close it when I did, not based on what I originally sold the put for. By closing it today, I made a realized gain of $393.20 on the SPY April $186 put. The risk of a reduction to that realized gain was higher than the risk of a reduction on my planned realized gain on my UWM April $72 puts. However, while there was only 0.47% in upside potential left on my SPY put, the missed opportunity on an annualized basis is more than 10.5%. I might open this exposure back tomorrow, after the jobs report, especially if we get a good dip at the open.
UWM Naked Put Risk/Reward Breakdown
- Potential profit: $640.08
- Potential return: 4.34%, 14.74% annualized
- Breakeven price: $73.80
- Downside protection: 15.91%
- Recent high: $92.46 on 3/4, nearly a month ago
- Cushion from recent high: 20.18%
- Expected support: $85 at the 50-day moving average, then $82.65 at the intraday low from last week, which is close to the 100-day moving average. If all else fails, I think UWM won’t fall below its intraday low hit on February 5, at $73.38.
- Position close goal/limit: I’m planning to ride this position through to expiration, even if it falls in-the-money briefly. If it falls below $73.00, I’ll consider cutting my losses. If I can get out in June for less than $0.30, I’ll exit with a good profit.