Only about 22 minutes of open trading time passed between when I wrote that I had an order in place to roll my MDY put from September to December to when my order hit. The time span happened to carry from the market close yesterday to today and I’m glad I got the order in and hope it was the right decision. A few hours later, the market has turned much higher and MDY is up more than $1.00 from where it was when my limit order hit. I won’t know until Friday if I should’ve waited on a purely dollar and cents basis, but for my plans and trading style/approach, I made the right decision when I placed the order.
While MDY was trading at $258.91, I bought to close one MDY September $265 put for $7.28 and sold one MDY December $265 put for $11.78. I received $449.30 for the calendar spread after paying $0.70 in commission. By rolling it, I increased my cushion from a loss by more than 1.7% while I also increased my upside potential by nearly 2%, but over an extra 13 weeks. After taking in $1,039.73 for the September put when I sold it in June, I exited with a realized gain of $311.39. That sounds small on such an expensive ETF (roughly a 1.2% gain), but it’s fantastic when you see that MDY only gained $0.13 in nearly three months. There hasn’t even been an ex-dividend date during that period (it’s due to hit in a few days), so I didn’t miss out on anything when I compare it to a buy and hold approach.
Rather than making this trade on Tuesday morning, I could’ve waited out the week and pushed to get every bit of time value out of the September put before Friday’s expiration. I also could’ve taken the assignment (assuming MDY doesn’t jump another $6+ from this morning’s price and move above my strike) and written a covered call. I didn’t like those two alternatives. The market is too volatile this week to predict what is going to happen over these final four days of the contract and I wanted to get out with a profit on the September contract without worrying about it. I’m still trying to avoid option assignments for the simple reason that I’ve covered in other posts – the paperwork is a hassle to do it correctly for taxes. It’s a lot easier to roll a put than track buy and sell price adjustments based on option premiums received. I’d rather just keep it simple since the risk/reward is virtually the same with naked puts versus covered calls – limited upside to gain and plenty of downside to lose. By keeping my strike in-the-money, I keep all (plus the increased premium) of the upside I had originally.
If MDY wasn’t facing technical resistance from its 10 and 20-day moving averages, which are facing a bearish crossover, I might have been more willing to wait out the trade for a few more days. After all, support is still holding on the 50-day moving average, currently at $256.75. The decision came down to my trading style I’m working with this year. I’m trying to roll my options before expiration and get out with a profit when I can. I had the opportunity and took it, even if I could’ve done better later. I believe whatever a trader’s style is, and there is not necessarily a right or wrong approach on these, it needs to be consistent. Sometimes it’ll be right and sometimes the alternative would’ve been better. By staying consistent, a trader gets the good and bad and avoids getting on the wrong side more than his or her share of the time. I decided to roll my positions early whenever I can increase my potential return and increase my protection from a loss. Isn’t that everyone’s goal, reduce downside and increase upside? This trade met my criteria easily.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $1,177.63
- Potential return: 4.65%, 17.52% annualized
- Breakeven price: $253.22
- Downside protection: 2.20%
- Recent high: $263.96, hit on September 3
- Cushion from recent high: 4.07%
- Expected support: The 50-day moving average could continue holding support at $256.75 and rising. If not, the 100-day moving average is ascending at $254.61, which happens to be close to the 50% Fibonacci line. The 200-day moving average is at $249.31 and close to the 23.6% Fibonacci line. I don’t expect a retracement this low, but won’t worry until the August 1 low of $246.59 breaks.
- Position close goal/limit: Like the September put that I just closed, I’m planning to hold this until the last week or two of the contract unless I can exit earlier with the bulk of my profit. That’ll take more than just getting up to the strike, especially since I sold this put three months out, a little longer than I’d usually like to, but no November contracts were available and October didn’t offer the premiums I wanted.