In my month end summary that I wrote a few days ago, I said that I was going to go shopping soon for some new trades. The one hole in my broad allocation was in international stocks, so I entered a limit order on FEZ for two naked puts. While FEZ was trading at $38.45 this morning, I sold two FEZ May $38 naked puts for $1.10 each and received $218.41 after paying $1.59 in commission.
The decision to trade on FEZ was easy. I had no international exposure and thought I should add some if the ETF dipped a little this week. My order was only good through today, so it triggered with less than five hours to go before I would’ve had to enter a new one.
The decisions of what expiration and what strike were fairly simple too after I plugged in a few different choices. I thought about the April strikes, but I already have five options (including my XOM spread as one) that are set to expire in April. The May puts gave a bit more downside protection while still allowing for a good annualized return. Once I knew I wanted to sell the May expiration, I checked out the strikes. When I entered the order, FEZ was two days past its recent high and had just fallen below its 10-day moving average of $39.07 at the time. I didn’t want to sell at the money puts with the ETF showing weakness, so I looked another rung down the option chart. The $38 strike gave me a decent buffer from a loss and a nice annualized return. If I remember correctly, the $37 strike had an annualized rate less than 10%, which pushed it out of my range.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $218.41
- Potential return: 2.96%, 15.09% annualized
- Breakeven price: $36.91
- Downside protection: 4.01%
- Recent high: $39.48 on 2/27/15
- Cushion from recent high: 6.51%
- Expected support: $38 acted as support in February and it could work out again in March. I’m not relying on $38 to hold support, which is another reason I didn’t sell the $39 strike. The 100-day moving average is at $37.72 and the 50-day moving average is at $37.51. Both of these could provide some support, but they don’t really have a great history of being as much of an influence lately. FEZ ended 2014 at $36.84 and a horizontal line drawn at that mark has been a good point of support a few times since October. Because I think FEZ will finish 2015 above its 2014 closing price, I’m comfortable with having a cost less than a dime above this mark, even if I run with a paper loss temporarily.
- Position close goal/limit: I’d like to be able to roll out of these contracts early on FEZ strength. If FEZ falls more than 6.5% from its recent peak and my options turn into a loss, I’ll be willing to take the assignment and ride it out. At a 10% correction, FEZ would hit $35.53; around its 23.6% Fibonacci line and I’d be comfortable riding the shares back into the upper $30s again.
I’m happy I didn’t get out of TLT too soon. I could say I’m upset that I sold the covered puts at $127, but I’m not. Those covered puts gave me the peace of mind that I needed while the 20-year Treasuries weren’t falling as quickly as I wanted them to. Even with the puts in place, I still made another $800+ today on paper and it kept my account in positive territory for the day while the SPX fell 1.42%. At least I didn’t get nervous enough to buy TLT calls for protection. The puts have about $0.36 in time value remaining over the next two weeks, which I’m going to try to hold out for if possible.
My account balance made it over $104,000 in the first half of today, but fell back to $103,756 by the close. It’s a little tempting to sell everything the next time I get over $104,000 and start over with farther out of the money puts. I was only expecting a gain of about $8-10,000 this year and with nearly 10 months remaining, I should be able to get there with less risk than I have on the table right now.