I had more option contracts make it all of the way to today’s expiration than I’ve had in a very long time. Coming into the day, I had one DIS January $90 naked put ($285.51 profit), two UWM January $73 naked puts ($1,160.09 profit), two UWM January $75 naked puts ($1,598.24 profit), one BABA January $110 naked put (will be assigned as I hold onto a $851 loss on paper) and one SSO January $125 naked put (loss of $90.45, rolled to new put). Both sets of UWM puts and the DIS finished out of the money by a safe margin. SSO and BABA didn’t work out as smoothly for me. Added all together, I would’ve had a realized profit of about $2,100 for today’s expiration (if I had dumped BABA at the close).
I’ll get back into DIS soon and might sell another one or two UWM naked puts far out of the money, but for today, I want to let the dust settle and see how the markets open on Tuesday after the long weekend. While today’s gains were nice, we didn’t get over yesterday’s highs for the S&P 500 and hit resistance at its 10-day moving average.
I have a quarter of my account in cash that is not backing any puts after today. I’ll be long 100 shares of BABA on Tuesday without a covered call on my shares. My MDY and BA puts are in the money as is my TLT call spread. So, I have plenty of upside if we get a good bounce in stocks (and drop in bond prices).
The BABA naked put that expired today was an option I wrote on the day BABA hit its all-time high. Bullish trades made near the peaks for stocks can be risky, but they pay well when the momentum continues. To my credit, I sold the put far out of the money. Much to my chagrin, I wasn’t even close to picking the right strike. In fact, I was off (including premiums) by about $8.50. In other words, I’m sitting on a paper loss of $850 now. I debated this one all week as I watched BABA slide. I could’ve gotten out with a small loss on Monday, but I didn’t think BABA would fall below $100. I was wrong by $4.46 as of this morning’s low.
I spent today wondering if I should sell covered calls on the shares I’m about to be assigned or just dump the put for a loss. I even thought about closing my put and selling a new put out of the money, maybe at the March $90 or $95 strike. As I was contemplating my next move, I checked to see how far off its high BABA had fallen. As of this morning’s low, BABA had fallen 20.38% from its high. I think the risk/reward balance could be turning in my favor at this point. 20% could be all of the shaking out needed to get a rebound. If not, I think there is a strong point of support that should surface around $90.00. Another $6.89 lower than today’s close won’t feel good, but I still like BABA for the long-term and could see it back above $110, if not to above its previous high of $120 within a year. I’d be more than happy to stick risk another 7% lower if I can earn a 15-25% gain over the next 12 months. As I was tempted to sell covered calls at the $105 or $110 strike, I might pull the trigger on a covered call once BABA has regained some ground.
If the market did bottom this week, BABA, as a high beta stock, could have a great run over the coming weeks. I expect it to push a little higher in the coming weeks before its earnings call on January 29. I’m planning to stick around until then, but might have to cut my losses if the earnings report isn’t encouraging.
Yesterday afternoon, I created a limit order to roll my SSO put out farther on the calendar and to a lower strike. I had a very busy morning of managing my clients’ accounts and I finally found some time to rethink my SSO order as stocks started gaining ground. I could see I had a chance to make a tiny profit (or just break-even) on my SSO put if the S&P could keep the accelerator on into the afternoon. As I started jotting down notes about different routes I could take to work this position, my original limit order hit. (That’s what I get for not canceling my first order while I was running new numbers.)
While SSO was trading at $121.31, I bought to close one SSO January $125 naked put for $4.29 and at the same time, I sold one SSO March $115 naked put for $5.54 and received $123.55 after paying $1.45 in commission for the calendar spread. My January put was $3.69 in the money still, which means I gave up $0.60 in time value on the final day of the option’s life. That’s not fun to realize, especially since SSO rose to $122.43 in the early afternoon before retreating some. In the final minutes of the day, SSO surged again and reached a high of $123.43, not that I had any way to know that was going to happen.
Before my limit order hit, I was thinking about exiting SSO completely with an order to close my January put for $3.30, a little below my cost. I would’ve come out a lot better if I had waited for the day to play out and for more of the time value to melt away, but with the volatility so big lately, I wanted to lock in my trade before something crazy happened to the downside. The additional gains from the rise in the ETF’s price would’ve been a bonus. However, I am happy that I kept my SSO exposure alive with a strike that’s $10 lower than I had in January. Lowering my risk was one goal of this trade and the other goal was to keep a position in place that could return a good profit for me. I have a good potential return for the $115 strike (even being more than $6 out of the money when I made the trade) and I gained an extra 9% cushion over what I had earlier.
SSO Naked Put Risk/Reward Breakdown
- Potential profit: $553.27
- Potential return: 4.81%, 27.19% annualized
- Break-even price: $109.47
- Downside protection: 9.46% (~5.5% on the S&P 500)
- Recent high: $132.64 on December 29, 2014
- Cushion from recent high: 17.47% (~8.5% on the S&P 500)
- Expected support: Today’s low of $119.49 was only $0.03 below the low two days earlier and could be the retest the S&P 500 needed to put a bottom in. This bottom also lines up with a trend line of higher lows that started on August 7, 2014 (ignores the lows in October 2014) and then touches the December lows and this week’s lows. That scenario would be ideal, but I wasn’t confident enough in it to have used a higher strike or just taken the assignment (although I was tempted). The 200-day moving average is at $116.86 and rising. This reference point is more likely to hold support and plays into my $115 strike better. I didn’t sell the $120 strike, which would’ve put my cost around $113.00+-, because I can see the potential for SSO to fall to the $109.50 area – in line with the August 2014 low of $109.46 (notice how close that point is to my cost if assigned). The October lows used this level as a speed bump too, with one day pausing on the way down and two days pausing on the way up around it.
- Position close goal/limit: If stocks reverse their recent weakness, I’ll try to exit this position for the majority of my profit and might try to sell another put at a higher strike. If the slide continues, I’ll try to hold on to work another trade like today where I roll the strike lower and take in more premiums than I have to pay to close it. If SSO falls below $100 ($100.09 was the October 2014 low), I’ll have to consider closing the position for a loss, but that would be about 12% lower for the S&P 500 and likely a point for stocks to reverse after finally having a true correction.