I’ve been using a steady plan of dumping far out-0f-the-money (OTM) naked puts once they got cheap enough and was planning to stick to that with my July UWM positions. Instead, UWM moved so much higher so quickly, that I didn’t react when the option prices first dropped and then I figured they were so far OTM that the risk wasn’t big enough to bother with, especially since I had a hedge in to cut some of the losses in a black swan event.
At the close of trading today, my three UWM July lots (six contracts in all) expired worthless. I was short two UWM July $71 and two UWM July $77 puts that I’ll take a full profit on and I’ll take a full loss on the two UWM July $75 I was long as a hedge. Originally, I paid $261.68 for the $75/71 put spread and received $640.08 for the two $77 strike naked puts. That gives me a realized gain today of $378.40 when I subtract the cost of the hedge from the profit on the $77 strike puts.
The hedge never came into play and I would’ve been fine without it, but I’m still glad I made the trade. Had I not owned two long puts, I would’ve been more inclined to dump my $77 strike short puts for a loss when the Russell 2,000 showed temporary weakness. In the end, I close out the multiple strike combination with a profit and that’s what matters, even if it could’ve been bigger with more risk. The same could be said if I used a higher strike. I could’ve made more, but for me, the risk wouldn’t have been worth it.
Knowing these three puts were expiring today, I saw that I would be left with more than $31,000 in unused cash. I had planned to sell new UWM puts yesterday, but once the market started to sell-off on news of the Malaysian plane crash, I decided to stay out of the way and see how deep the slide would go. I thought we might get more weakness this morning and then see a good rebound mid-morning when traders realized nothing had really changed in the world of stocks.
Rather than waiting a few hours into the day, stocks started above yesterday’s close and continued to build strength into the afternoon. I saw the futures were higher pre-market and tried to catch an easy trade on some UWM October $75 puts, but my limit order didn’t hit. I started slightly above the midpoint of the bid/ask prices at $4.50 and by 9:35 I lowered my order to $4.20, still hoping for a dip later in the day.
The Russell 2000 closed below its 200-day moving average yesterday and opened below it again. By 10:45, the small-cap index was above the long moving average without dipping below it again. The 50-day moving average posed more of a challenge and remained resistance through the end of trading. Instead of chasing my order any further, I opted to remain patient to see if something might change on Monday to allow for a better entry point.