Not quite a month ago, I closed my XLF June $23 naked puts while XLF was trading at $22.83. It was the right trade to make because XLF retreated to $22.47 as recently as late last week. However, the Financial Sector ETF rebounded yesterday and had a follow through day today as JP Morgan and Goldman Sachs (two of the ETF’s top 10 holdings, more than 10% of the ETF’s assets) beat earnings estimates before the market opened.
I checked the closing trade for the September $23 puts and saw the last trade was at $0.64 on Monday afternoon. The pre-market pricing showed XLF was probably going to open around $23 after closing on Monday at $22.83. I thought I might luck out and get a trade in at the open if I had an order in place at $0.60, but the bid/ask opened at $0.55/0.59. Within a minute, I lowered my order to $0.57, but XLF traded up to $23.04. I waited for a little retreat and finally changed my order to $0.55 and left it for the day, knowing it wasn’t worth chasing any lower. It only took another few minutes for it to hit.
While XLF was trading at $22.97, I sold four XLF September $23 naked puts for $0.55 each and received $217.57 after paying $2.43 in commission. I didn’t want to go out any farther out on the calendar than September for the contracts and when I glanced at the August puts, it was easy to see they wouldn’t be worth the trade since they were so cheap and I figured XLF might bounce around by $0.50 on either side of $23 for another few months. If I had left my order in for $0.57, it would’ve hit by noon, but I didn’t want to miss the order and knew I wouldn’t be at my desk for the rest of the day to make adjustments. By selling at $0.55, I had already calculated that I’d be above my minimum return for this trade (I wanted at least 12% annualized). I wasn’t willing to go any lower and didn’t have to.
My last lot of XLF puts had only three contracts. I raised it to four this time because I’m more confident that the bottom won’t fall out of financials before my options expire. Also, I’m very under-invested and need to get back on the ball with making trades, just as I said a couple of weeks ago. Some of my UWM puts expire this coming Friday and I’ll probably replace them before then if I can make the time for it.
As a father of a 10-year old son who is very active, I can easily understand why trading volume drops in the summer most years. Along with the recent passing of my mother-in-law, this summer has pulled us in all different directions and my desk time is spent on my clients’ accounts with any extra time spent on my own. I’m ready for school to start again and have some better volatility return to stocks. I expect post-Labor Day volume and volatility to pick-up a good bit from current levels. I’ll probably update my hedges before then as I add in more exposure again.
XLF Naked Put Risk/Reward Breakdown
- Potential profit: $217.57
- Potential return: 2.42%, 12.85% annualized
- Breakeven price: $22.46
- Downside protection: 2.24%
- Recent high: $23.07 on July 3
- Cushion from recent high: 2.66%
- Expected support: $22.50 – close to where XLF found support last week and not far from the 50-day moving average
- Position close goal/limit: I’d like to take these puts through expiration to let them expire worthless, but if they are close to the money near expiration, I’ll be willing to buy them back for a profit rather than take an assignment.