I only had one option set to expire today and I decided to buy it back before the shares were assigned. While XLF was trading at $22.83, I bought to close three XLF June $23 naked puts for $0.18 and paid $55.26 including $1.26 in commission. Three months ago I sold these puts in-the-money for $1.00 each and received $298.79. This closing trade gave me a realized profit of $243.53. XLF was trading at $22.47 when I sold the puts three months ago, so $0.36 of my gain per put was from intrinsic value. The rest was extrinsic value or time value. I think I made the right trade by getting out this morning. XLF fell another $0.06 into the afternoon.
I was XLF worried about this trade for a few weeks as XLF fell as low as $21.20 in early April, but then the comeback began. It traded closer to my strike last week and earlier this week, but the time value, even a few days ago, was close to a dime. By waiting, I was able to get out with only a penny of time value, but lost more intrinsic value since the ex-div ($0.0896) date of record was today. I’ve been planning to roll these June puts out to August and had a limit order in place for more than a week, but premiums dropped so much that I didn’t think the August puts were worth the trade yet. The same went for the September contracts. I expect XLF to bounce around some more and will probably enter a limit order for more naked puts to hit on a dip.
My next order was a mistake, but I like it for now. I meant to enter the order for a client of mine and apparently didn’t change the allocation to his account instead of mine. I think this is the first time I’ve made this mistake. (It worked out for him because I was able to go in and get a dime more on the same contract just a few minutes later.) While MDY was trading at $258.78, I sold one MDY September $265 for $10.40 and received $1,039.73 after paying $0.27 in commission. This trade put me on potential margin if everything is assigned. I would’ve closed it today if I hadn’t removed the XLF exposure earlier. I even had a chance to get out by the end of the day with a small profit as MDY pushed over $259.00 before the close and the contract looked like it could have traded at $10.30, if not $10.20.
Just in case it works out for me, I entered a limit order to close my lower MDY September $260 strike put. I have a paper profit of more than $250 on it so far and now it doesn’t have nearly a much upside that the $265 strike does. I like the $265 strike better simply because it has more reward possible than the $260 strike and the downside risk is only about $2.10 more, not even a 1% difference from the current MDY price. I didn’t want to go out any further than September and the August $265 put didn’t give enough downside protection for what I wanted.
I spent some time thinking about closing the MDY $265 strike put anyway, but saw that a better option to close might be my SPY July $190. I didn’t plan to make that trade yet, but after entering a limit order that I thought would hit next week, it traded at 3:58 this afternoon. While SPY was trading at $195.96, I bought to close one SPY July $190 for $0.55 and paid $55.72 including $0.72 in commission. The $0.55 I gave up was only worth 0.28% in upside potential. Even annualized that gain would have only been 3.70%. It was an option I should’ve planned to close even if I hadn’t sold the new MDY put. Not much more than a month ago, I brought in $436.95 when I sold this SPY put. By closing it today, I earned a realized gain of $381.23 in a much shorter time than planned.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $1039.73
- Potential return: 4.08%, 16.20% annualized
- Breakeven price: $254.61
- Downside protection: 1.61%
- Recent high: $259.54 (hit yesterday, before the dividend of $0.7788 went ex-dividend today)
- Cushion from recent high: 1.90%
- Expected support: $257.20 could be retested at the 10-day moving average within the next few days. That’s close to the trend line of higher lows that started in the second half of May. The June dip to $254.10 could provide good support too. It’s just below the ascending 20-day moving average. If these first two levels don’t hold support, $252 might work. This is where resistance surfaced a few weeks ago and then was the low on a huge positive day on June 5.
- Position close goal/limit: Since this put is in-the-money, I doubt I’ll get an opportunity to buy it back for close to a full profit very early. If anything, any weakness will force me to close a different position earlier than originally planned to free up more cash to handle being assigned these shares.
Alex, great trade and excellent idea for me (or inspiration). I always tried to trade OTM options because of fear of assignment, but now I can see that if done against European options, you cannot be assigned and you can take advantage of a time decay. I like that idea a lot and definitelly will give it a shot in my next trade.
Does it matter if you take ATM or one strike ITM or deep ITM option? I think the time value is still the same and the intrinsic changes as the stock goes up or down by delta, right? Or what would be your recommendation on strike if you take ITM trade? And still you want an index which will rise in price not to lose money on intrinsic value growth, right?
Martin, I only trade American options and have never even looked at European options.
Good question on time value. I assume (don’t know for sure) that the rate of decay for time value depends on how far away from the strike and volatility, but the biggest changes come from the underlying’s price movement for intrinsic value. The entire option price changes quicker with ITM options as the underlying moves if that helps.
OTM options don’t have the intrinsic influence and can lose value on a slightly down day if far enough OTM and the move lower isn’t big. You’ll see that a lot more change as expiration gets closer.
I’m not sure I follow your question. So let me know if my answer helped or not. I tend to only focus on ITM options when I think the underlying will move higher before expiration. So, if I think the underlying has 2-4% upside in it by expiration, I might aim for 3-5% ITM options to give me a little extra possibility for gains if I’m aiming too low. As long as there’s some time value in the premium I get a little cushion. If there’s little to no cushion, you might as well buy the shares outright to have more upside potential.