After I wrote my month end summary this morning, I thought I was finished writing for the day. Then, over a span of nine seconds, two of my limit orders hit when stocks were near their lows of the day. I forgot that I entered my YHOO order as a “Good-til-Canceled” limit order, but that could be a good thing as I currently have the high trade for the day on this contract. While YHOO was trading at $40.15, I sold three YHOO November $37 naked puts for $0.85 each and received $253.52 after paying $1.48 in commission.
I hesitated to make this trade since I recently sold a BABA naked put and BABA’s price action can heavily influence YHOO’s stock price. I decided to move forward with it because I think YHOO has value on top of its BABA stake. I kept my strike far out-of-the-money because there’s a lot of volatility in YHOO still and I wanted a wide buffer to protect me. Since YHOO has been so volatile lately, the option premiums made it easy to aim far below the stock’s current price and still get a good annualized return.
The YHOO October $37 strikes were dirt cheap, so it was easy to rule out a very short-term expiration. The December options were trading a little higher than the November options, but the annualized gain was lower and I would’ve only improved my cost per share by about $0.30. The comparison made the November expiration an easy decision. I might look back and wish I had used a lower strike, but at nearly 10% above my break-even point, I like my chances.
YHOO Naked Put Risk/Reward Breakdown
- Potential profit: $253.52
- Potential return: 2.34%, 15.99% annualized
- Breakeven price: $36.15
- Downside protection: 9.95%
- Recent high: $44.01 on 9/15/14, a few days before the BABA IPO.
- Cushion from recent high: 17.85%
- Expected support: This morning’s low of $40.11 might be the lowest price we see for a while, but YHOO is trading below its 20-day moving average now and dipped below its 10-day moving average this morning when my trade went through. My $38 strike put was based in part on my belief that the intraday low from 9/23 at $37.94 will continue to hold support. The 50-day moving average helped then and now the slower-moving average is up to $38.40. If I’m wrong on the 50-day moving average, I think the 200-day moving average, currently at $37.05, will be a good reversal point and bring in the bulls again.
- Position close goal/limit: I’d like to get out of this trade by late October or early November if YHOO has leveled off or moved higher a little. I’ll be willing to hold this position longer if I can get out of BABA for a good profit sooner.
Rarely do I take a complete gamble with a trade, but that’s exactly what my TLT trade was, with a longer-term plan to follow. While TLT was trading at $117.33, I bought two TLT October 3 (weekly expiration that expires two days from now) $17.50 puts for $0.75 and sold two TLT October 3 $17.00 puts for $0.50. I paid $53.16 for the two $0.50 put spreads and have a maximum profit potential of $46.84 if TLT falls back below $17.00 by the end of this week. My original order included another short put spread at the $15.50/15.00 strikes. Adding in the short spread at the lower strikes would’ve reduced my cost, but would’ve opened me up for losses on the downside if TLT slid quickly. I cut out the lower spread because the net premiums had fallen to roughly $0.05 and I didn’t like the risk of losing $0.45 while only gaining a nickel.
I’ve traded options on TLT some in the past with decent success and came up with another idea that would’ve worked on a regular basis for the past couple of years. We all know patterns can change and history doesn’t always repeat. That’s why this is more of a gamble than a true investment. The short duration of this trade and the ones I have planned in the coming weeks add to the risk/gamble of this approach. I’m not claiming this is the smartest trade I’ve ever made, but it should be fun to follow for readers as it plays out.
I’ll start with the facts that got me here. TLT is very volatile. Based on the data I looked at from August 2012 to now, TLT tends to move higher in large jumps over short periods of time and rarely has more than three weeks in a row of gains. It finished four weeks in a row higher the week ending 4/1/13. It finished five weeks in a row higher the week ending 1/27/14. I only saw two other instances in the past two years where TLT had three weeks in a row of gains. One of those periods is running now as TLT is close to the 1-year high hit in August.
And now for my opinions. I think TLT will hit resistance around its recent high ($119.43) again, if not sooner. I believe that if TLT has reason to run even higher, it will happen over the next two to three weeks (if not all within the next week) and then it’ll start falling again. Remember the worries from a couple of weeks ago that the Fed would raise rates and yields would skyrocket, forcing bond and treasury prices lower? I expect that notion to stir its head again soon.
Based on these facts and opinions, I figured I could risk $53.16 on a gamble for fun and hopeful profit. If it fails, I’ll make a similar trade on Friday afternoon for next week’s weekly expiration, but I’ll put $100 at risk. If that doesn’t work, I’ll risk $200 and then $400. If I lose for four weeks in a row, I’ll be out roughly $750, depending on what premiums I pay each time and TLT will have been up for six straight weeks. If I haven’t “won” in four weeks, TLT should be into the $120s again and I’ll probably switch to call spreads and will be willing to take an assignment on the short call (making me short TLT) and then take the profit on the long call, as I did in July 2012.
The only reason I like making this trade with TLT is that I view TLT as an ETF with a ceiling. Yields can only get so small before bond/treasury buyers flee in search for better returns and lower risks elsewhere. When it reverses, I think TLT could fall below $113 quickly and could make it below $105 within six months and below $100 in a year. As TLT pushes higher, my risk gets lower because the ceiling is closer. For this week, a lot rides on Friday’s jobs’ report. In the weeks when I lose, I’d prefer to lose by a wide margin so the following week’s upside potential for TLT is lessened.