Rolled UWM Naked Puts

I’ve been watching UWM as the Russell 2000 index worked through its decline.  Before today, I had two UWM October $75 puts and two UWM October $73 puts.  I sold these puts when the strikes were far out-of-the-money in June and July respectfully.  Yesterday, the $75 strike puts moved in-the-money and today the $73 strike puts moved in-the-money briefly.  Since I sold both of these legs far out on the calendar, I had good premiums to work with and I showed a paper profit all day today.  Although my profit was dwindling compared to where it was a week ago, I could have walked away with a good gain if I had exited at this morning’s lows.

I entered two limit orders a few cents above the bid/ask so I could roll my October puts out to January.  While UWM was trading at $73.65, still on its way lower, I bought to close two UWM October $75 naked puts for $4.00 and sold two UWM January $75 naked puts for $8.00.  I received $796.53 for the calendar spread after paying $3.47 in commission.  I was a little lucky on this order in an odd way.  Although the middle of the bid/ask for the October put was $3.38 and the middle of the January put was $7.35, my order hit $0.62 above what I thought I’d pay and $0.65 above what I thought I’d get.  The part that makes this lucky for me is that my realized gain that’ll be taken in 2014 was reduced and moved into 2015.  (It’s the small things that entertain me sometimes.)  My net premium was the same.  I just don’t have to pay taxes on as much (I ended with a realized gain of $19.43) until I close the position in January.  Having an $8.00 sale makes it easier to work out a profit on further small cap weakness too.

My limit order to roll my $73 strike puts didn’t hit and I decided to cancel it and try to work the order one leg at a time.  The open interest on these contracts is very light and I figured I might have better luck getting one order to work at a time rather than trying to find a taker who would be interested in swapping both legs with me.  It didn’t work exactly how I planned, but I got it to work eventually.  In hindsight, it might have been better to just lower my asking price for the calendar spread.

While UWM was trading at $75.01, up $2.42 from its morning low, I bought to close two UWM October $73 naked puts for $1.70 each and paid $340.73 including $0.73 in commission.  I changed this order a few times before it hit.  Originally, I tried to buy these puts for $2.00 and quickly saw the bid size go up over 1,000 to match my order.  I raised it to $2.20 and sat on it until I saw UWM reverse its direction and saw the bid size drop into the double digits.  I lowered my order to $2.00 again and then before leaving to run an errand, I dropped the limit order to $1.70.  By this point, I was content to hold onto the option since UWM was back in positive territory and I thought I might be OK to hold onto it for the last 11.5 days of the contract.  When I got home, I saw my lowered limit order hit and I was out of the UWM October $73 puts for a realized gain of $158.52.

Immediately, I tried to get my new January order in and started at the mid-point of the bid/ask for $6.50.  Every minute or two, I’d drop the limit order another 10 cents.  I let it sit at $6.00 for at least 30 minutes only to see UWM start to climb again, so I took two more stabs at lowering my asking price before my order hit.  While UWM was trading at $75.26, I sold two UWM January $73 naked puts for $5.80 each and received $1,160.09 after a $0.09 commission rebate.  In the end, I effectively sold a calendar spread for a net $4.10 premium after trying for the single order combination at $4.30 in the morning.  Based on how the bid/ask spreads narrowed, it looks like I probably could’ve pulled out $4.10 on my original order with a lot less jockeying around.

Comparing the two calendar spreads, I took in an extra dime for rolling the $73 strike puts and finished it when UWM was $1.61 higher.  The $75 strike spread changed my potential return from 4.71% to 8.63% upside potential and moved my cushion from 4.93% to 10.71%.  The $73 strike spread moved by upside potential from 5.62% to 11.93% and changed my cushion from 3.59% to 9.02% of downside protection.  These are good numbers on all fronts, especially if UWM stays above my new (lowered) costs per share if assigned.

UWM January $75 Naked Put Risk/Reward Breakdown

• Potential profit: $1,598.24
• Potential return: 11.93%, 40.27% annualized
• Breakeven price: $67.01
• Downside protection: 9.02%
• Recent high: $92.32 on 7/1/14 and $87.79 on 9/3/14
• Cushion from the most recent high in September: 23.67%
• Expected support:  Today’s low of $72.66 met a trend line that started on February 5 and was touched on May 15.  I’d like to see this trend line continue to hold support.  The previous two visits down to the slightly negatively slanting line were single day visits.  I expect the same from this visit which should mean small-caps move north after tomorrow’s jobs’ report.  UWM is already far below its daily moving averages that I like to watch.  Switching to a weekly view, the 100-week moving average is at $70.18 and ascending.  Any move south of that and we could see 52-week lows.
• Position close goal/limit:  At this morning’s lows, the Russell 2000 was down by more than 11% from its March high.  I’m willing to hold on through further losses after this much downside already.  I’d like to let this position run until January 2015 to move my capital gain into next year.  If I have a sizable paper loss in late December, I might consider realizing it to get the write-off.

UWM January $73 Naked Put Risk/Reward Breakdown

• Potential profit: $1,160.09
• Potential return: 8.63%, 29.34% annualized
• Breakeven price: $67.20
• Downside protection: 10.71%
• Recent high: $92.32 on 7/1/14 and $87.79 on 9/3/14
• Cushion from the most recent high in September: 23.45%
• Expected support:  See above.
• Position close goal/limit: See above.