I mentioned yesterday that I had a couple of options I still needed to deal with for May expiration. I decided to move on both of them today instead of waiting for the end of the week and expiration, just in case something happened over the next few days that took away from the profits I have available today.
My FEZ position was an easier decision than my F position. Actually, I had the order in for FEZ at the end of last week, but it didn’t hit since FEZ moved higher yesterday. Today, I came back in and lowered my limit price and the order hit within a couple of minutes. While FEZ was trading at $43.67, I bought to close two FEZ May $43 puts for $0.12 and at the same time, sold two FEZ August $44 naked puts for $2.12 each. I received $396.83 for the diagonal put spread after paying $3.17 in commission.
I decided to go for a higher strike on the FEZ options because the potential return is much better than the difference in how much I could lose if FEZ turns against me. More exactly, the $44 strike offers close to a 4.5% better annualized return than the $43 strike, but only 1.1% more possible downside if FEZ loses money. Also, since I have the hedge that I bought yesterday, I was more comfortable selling these puts in-the-money. FEZ has a beta of 1.6, so it’s nothing close to an even hedge with my long SPY puts, but it does help. If I didn’t think there was more upside in FEZ, I wouldn’t have taken the additional risk.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $422.41
- Potential return: 5.04%, 19.14% annualized
- Breakeven price: $41.89
- Downside protection: 4.08%
- Recent high: $43.97 on 5/8/14
- Cushion from recent high: 4.74%
- Expected support: $43.28, the 20-day moving average, then $42.65, around the 50-day moving average and the intraday low on 4/25 and finally, the low on 4/15 at $41.59 could offer support on a retest of this dip in price.
- Position close goal/limit: As always, I’d like to stick with this trade through expiration, but would be happy to take an early profit if FEZ climbs quickly and the premium tanks. To the downside, I’m willing to take an option assignment if FEZ stays below the strike. It’s only about 8% of my account value and I don’t think Europe (the basis of the ETF) is on the cusp of a major bear market.
I went back and forth on how I should manage my four Ford (F) naked puts. I considered rolling them out to July or even August at the same strike. I even thought briefly about selling new puts at a lower strike to reduce my risk. Instead, while F was trading at $15.85, I bought to close my four F May $16 naked puts for $0.20 each and paid $81.96 including $1.96 in commission. This closing trade gave me a realized gain of $273.92 on the $6,400 I would’ve had to pay to buy the shares if assigned. That’s close to a 4.5% gain in three months (273.92/(6400-273.92)). Not fantastic, but better than the return the broad market did over the same period.
I could end up regretting that I bought these F puts back with three and a half days to go in the contract. F could easily move above $16 by the end of Friday. In fact, I expect it to. Pay attention high volume stocks that are close to their strikes. Often, they drift towards the nearest strike at expiration and float back and forth across the line a few times before closing $0.10 – 0.20 above or below it. Although I recognize the risk of leaving possible profit on the table, I would’ve regretted it more if F dropped another $0.30+ and I lost some of the gains that I was able to realize today. I left the trade with a good profit and am content with that. I used to push for every extra penny I could get. Finally, I realized I was losing more than winning by trying for that little bit extra. The trades went in my favor more often than not, but when they didn’t, I got spanked and that’s not fun or good for the account balance.
Now I’m back to having nearly $10,000 that isn’t backing any puts. Since today is pretty much flat, I want to see what tomorrow brings before I allocate these funds anywhere. I might even enter a couple of different limit orders and see if one catches a dip. My first thought is to add more DIS exposure since my June put is getting cheap, but I’m going to look around more before making a decision. Let me know if you have any suggestions on good stocks or ETFs I’m missing. As always, commenting helps others, but I can always take emails for those of you who like to keep your opinions more private.