More UWM Naked Puts

When six of my UWM July puts expired (four short, two long) last week, I mentioned my attempt to sell some August $75 naked puts.  The order didn’t hit and I didn’t go after it again during yesterday’s dip.  Maybe I should have because the small cap index gapped higher today.  At the same time, maybe it’s good that I didn’t because I’m still worried about the near-term performance of small caps.  Obviously, I’m torn.

UWM, the leveraged small cap ETF, fell a nickel below $80 on Thursday, but has had a higher low in each of the next three trading days, including today.  I like seeing that strength on the bounce, but the technicals aren’t completely rosy.  Thursday, Friday and Monday each had days with UWM below its 200-day moving average.  Today, it has stayed above its 200-day moving average, but has crossed its 10, 50 and 100-day moving averages in both directions, multiple times.

Instead of staying glued to my screen and chickening out during the next dip lower over the next couple of days, I entered a limit order this morning for two UWM October $73 puts.  After much debate over which strike to sell, I went in with a weak attempt good for two days.  My plan was to let the trade come back to me (which didn’t work last time either).  These UWM option contracts have wide spreads between the bid and ask and I set my order above the midpoint by about $0.20.  I was still $0.30 below the lowest ask, but as soon as I entered my order, another 50 contracts automatically came to meet my price on the ask side.  The bid didn’t budge.

I tend to have more success on UWM options when I see my order as the only ones at the ask price.  Eventually, I either get someone on the other end who makes a bad trade and hits my order or the ETF reverses briefly and someone panics into my order.  Today, I wasn’t as patient.  I lowered my order to $2.85, closer to the where the midpoint was earlier.  By then UWM had started to climb and even more offers to sell came in to meet my lower price.  I waited a little while and then lowered my order to $2.70.  Only 10 other offers came to meet me at first, then another 10 came a few minutes later.  I waited a couple of hours at that price and saw UWM push even higher.  I double checked my options spreadsheet and decided I could go as low as $2.50 and still earn a good return.  Another couple of hours later, UWM fell back below its 50-day moving average again and my order hit.  While UWM was trading at $83.40, I sold two UWM October $73 naked puts for $2.50 each and received $499.25 after paying $0.75 in commission.

I had an alert set if UWM fell below its 50-day moving average and it was interesting to see the (clearly algorithm generated) price movement.  After creeping along, UWM fell more than $0.40 in under a minute.  The stint below the 50-day moving average didn’t last too long, but long enough to trigger my order and scare me briefly.

Going back to my debate over which strike to hit, I ran numbers on everything from the $65 to $75 strike.  I didn’t consider the September contracts for too long because the first few that I looked at didn’t have much of an advantage over the longer dated ones.  Usually the annualized return is better on shorter contracts, but with leveraged options, farther out-of-the-money, I see the opposite more often.  My main concern was getting my cost if assigned close to $70 while getting more than a 13% return.  The $70 cost-if-assigned number came from the lows seen twice this year around $73.  I wanted to have a few dollars buffer below the previous lows in case it overshoots a little on the next move lower.  Also, I wanted to have a little more room for a correction beyond 10%.  Those two factors gave me a target strike cost-if-assigned close to $70.

The $75 strike offered more than a 17% return and a pretty good cushion, but with the recent weakness in small caps, I thought it’d be wise to push for more safety.  Everything below the $73 strike either didn’t give much more safety or had a severely diminished return.  Since I already have two UWM October $75 naked puts, I decided to add in these at a lower strike that still offered a good return.

UWM Naked Put Risk/Reward Breakdown

• Potential profit: $499.25
• Potential return: 3.54%, 14.61% annualized
• Breakeven price: $70.50
• Downside protection: 15.46% (about 7.5% for the Russell 2000)
• Recent high: $92.32, hit on July 1
• Cushion from recent high: 23.63% (almost 12% for the Russell 2000)
• Expected support:  $80.00, Friday’s low could hold based on the past few days’ price action.  If $80.00 breaks for more than a minute or two, UWM could trade all of the way back down to its February and May lows in the low $73 range.
• Position close goal/limit:  If assigned, I would be buying in after the index has already lost nearly 12%.  I’m fine with starting to build a good position then.  That will be my stance until something fundamental changes in the economy.  We could have a correction based on political turmoil in multiple parts of the world, but a true recession that lasts probably won’t hit until something major changes the market’s momentum.