Sometimes, I make good trades and sometimes I make bad trades. I rarely know which it’ll be within the first week after the trade. I made a new trade today that I’ll be wondering about for weeks to come, but I think I made the right decision. While BA was trading at $126.82, I sold one BA November $125 naked put for $3.40 and received $339.20 after paying $0.80 in commission. I found the idea in this weekend’s Barron’s article by Jack Hough. As expected, BA gapped higher at the open based on the bullish outlook Hough painted. I watched the price action for the first 30 minutes to see if it’d come off its opening highs. After about 10 minutes, it peaked at $127.03 and then dropped about 30 cents before regaining its footing. I decided to take a chance and sold my put when BA found its footing.
I’ve been thinking about BA for more than a week since it’s down so much from its recent highs and wanted to see some indication that the worst of the selling was over. On Friday, BA fell below its 20 and 50-day moving averages and I was glad I had waited for a better entry point. Hough’s article brought back positive attention to the company and the stock jumped back over its 20 and 50-day moving averages at the open and worked its way above its 10-day moving average. The risk with BA right now is that it could experience a short-lived bounce and then resume its decline.
As of the time when I made my trade, BA was more than 8% below its high hit in June and up more than 7.5% from its low hit on its ex-dividend date in early August. It’s still a few bucks below its 200-day moving average and could face resistance there again, as it has since falling below it on June 25. I expect it to pause there, but then push through again. If I’m wrong, I don’t think the downside risk is very big. That’s one of the reasons I didn’t aim for a lower strike. While selling the $120 strike would’ve given me 3% more room for error, I don’t think I’ll need it. Also, the November $120 premiums only offered a 7.38% annualized return and I can handle a little more risk to get a much better return. The October contracts are only six weeks away and will see faster time value deterioration, but the annualized return isn’t as good as the November contracts. If I’m going to reduce my annualized return, I want to have a better cushion, but the October $125 puts don’t offer it, so the November $125 puts were an easy decision since I knew I didn’t want to sell in-the-money puts right now.
BA Naked Put Risk/Reward Breakdown
- Potential profit: $339.20
- Potential return: 2.79%, 13.19% annualized
- Breakeven price: $121.61
- Downside protection: 3.83%
- Recent high: $138.40, hit on June 9
- Cushion from recent high: 12.13%
- Expected support: Friday’s low of $124.10 should offer good support on any retracement, but I don’t think BA will fall below its 20-day moving average at $125.59 today and climbing. By tomorrow or Wednesday, this moving average should be around today’s intraday low. If these levels don’t hold support, I could see BA heading as low as the $118 area to retest its August low. From there, it should rebound quickly.
- Position close goal/limit: I plan to let this put expire worthless or take an assignment, but will change that plan if any big negative news hits BA. As long as it stays in its current pattern, with no major news events, my trade should keep me in a good position. If I can get out early for under $1, I might take the opportunity to take the majority of my profits and roll the strike higher or just move on to something else. BA is already up another $1.00 from where it was when I sold my put, just 95 minutes ago, so I might be able to exit more than a month early.