I talked about my UWM option positions in my last post. It looked like small-cap stocks were turning around and I figured I should wait before exiting my four naked puts since I had so much time value left to erode still. Over the weekend, I came up with another plan that seemed like it could work better for me.
While UWM was trading at $77.34, I bought two UWM July $75/71 put spreads for $1.30 total and paid $261.68 including $1.68 in commission. I placed my order $0.05 below the midpoint of the bid/ask and the order hit immediately and the midpoint quickly changed to $1.20. I think I could’ve done better if I was more aggressive with my bid, but I didn’t want to miss buying my insurance if the market reversed before my order hit.
The actual four trades that made up my spreads were interesting. Both pairs cost $1.30 each, but the individual contract legs sold at different premiums. I bought one of the July $75 puts for $4.06. It was matched with a $2.76 July $71 strike put. The other combination went for $3.90 and $2.60 respectfully. These two different prices (3 hours later) still show as the high/low for trades today on each strike since they are the only two contracts that have traded today at each strike. This shows what can happen with wide, fairly illiquid options.
I thought about being more aggressive with my purchase and trying to get a better price, but the lessons I’ve learned in the past about missing a trade outweighed the lessons on how to get the best price possible. UWM traded as high as $78.07 late in the morning before starting to trail off in the early afternoon. I’m writing this well before the market closes for the day and wouldn’t really be surprised to see UWM move a dollar in either direction over the next few hours.
I decided to buy this put spread as a hedge instead of buying back my UWM July $77 puts because the naked puts would’ve cost around $4.30 each and I didn’t want to fork out $860 for strikes that were out-of-the-money at the time. By buying the $75/71 put spread, I protect myself from most of the losses I think UWM could inflict on me over the next two months and still have a good bit of upside remaining. If I really thought UWM had a high probability of tanking, I would’ve bitten the bullet and bought my naked puts back or just gone long with new puts at a different strike.
I’m not worried about my July $70 naked puts yet, but could come back and buy a $69/65 put spread if it looks like weakness is returning. If UWM does start to collapse, I’ll have to think about buying four put spreads at the lower strikes to avoid losses after this new spread stops providing a hedge.
Since the Russell 2000 small-cap index already hit a 10% correction at the end of last week, I don’t think it’ll fall another 4% and push lower than my UWM July $71 and $70 strike short puts. If I’m correct and UWM stays north of $71, I’ll lose $1.00 from the difference between my short $77 strike and my long $76 strike. I’ll also lose the $1.30 I paid for the put spread. Those combined losses would equal $2.60, which is less than the $4.30 I would’ve paid by closing $77 naked puts today and is also less than the $3.20 I took in when I sold the $77 puts originally. In short, I improved my probability of a profit from my UWM exposure.
My profit picture for July is still intact if UWM stays above $71.00. Not including commissions, I should take in $640 from the July $77 puts and $680 from the July $70 puts. I could lose all of the $260 from today’s put spread purchase, plus another $200 from the difference between my $77 naked put and the top end of my put spread at $76.00. That gives me a potential realized gain in July of $860-1,060. My only other July position is one July $190 naked put that I sold for $4.38 a week ago. The SPY put is $1.47 in-the-money right now, leaving me with $291 of time value to protect me from a loss for the next 1.5% of downside. Ideally, SPY will gain at least 0.8% over the next two months and I’ll have a realized gain of $1,498 in July, minus some commission costs and plus any new trades I make.