I cancelled my limit order to roll my MDY March $165 naked put before the Fed’s announcement yesterday afternoon. I decided I would try to wait for an opportunity on an MDY dip post announcement to sell a new MDY put and possibly let the March put run until expiration for the last two and a half days of the week. If MDY fell hard, I estimated I could do a lot better by selling a new put on weakness with the belief that the bottom wasn’t going to fall out any time soon. We didn’t get the dip I expected, but did get the push higher that I thought we’d get. Since I waited for a better trade, I missed a good opportunity to earn a few extra bucks on the trade I ended up making today.
While MDY was trading at $277.18, I sold one MDY June $275 naked put for $7.90 and received $789.64 after paying $0.36 in commission. I think I could’ve sold the same put for $8.50 yesterday morning, so it’s not a huge difference, but would’ve been nice to have. I tried leaving a limit order in to sell at $8.50, but by 1:00 this afternoon, I had a couple of thousand other contracts sitting on the ask line with me. I cut my limit order to $8.10 and 200 contracts followed me. A few minutes later, I dropped it to $8.00 and saw 20 contracts follow me. After letting it sit for a little while, I saw the bid had come up $0.10 to $7.80 and I lowered my ask to $7.90. The order hit within five minutes.
During the morning’s weakness yesterday, I wondered if I should sell a $270 strike June put instead of the $275, but decided to be a little more aggressive since my cost per share if assigned isn’t bad with the $275 and I think we have more upside left by mid-year. While I had that bullish though running through my head I even considered selling the $280 strike instead (especially as stocks continued to rally into the late afternoon yesterday, but decided the risk wasn’t worth the extra $200+- I could’ve made.
In the end, I decided the potential return on the MDY strike would work for my needs and would allow me room to take additional risk elsewhere.
MDY Naked Put Risk/Reward Breakdown
- Potential profit: $789.64
- Potential return: 2.95%, 11.55% annualized
- Breakeven price: $267.11
- Downside protection: 3.63%
- Recent high: $279.28 on 3/18/15 (yesterday)
- Cushion from recent high: 4.36%
- Expected support: We could see support at the 10 and/or 20-day moving averages, currently at $273.12 and $274.19 respectfully. These two lines will converge again soon, so support could end up being around $274.50. While those two moving averages could play a roll, the 50-day moving average has a better record of making a difference. The 50-day held support at $267.87 (which could be its own support if MDY retests that low) and it has moved higher since then. I think the 50-day moving average should be up to $270, if not a few bucks higher, by the time we get another extended move lower. MDY closed 2104 at $263.95 and I believe it will finish 2015 higher, so this is my real expected floor if all else fails.
- Position close goal/limit: With my potential cost per share close to $267, I think I’ll be safe to take an assignment if MDY drops more than I expect. If MDY rallies, I’ll look for an opportunity to close the put early for $0.50 or less.
The most painful part of yesterday’s rally wasn’t that I missed a few bucks on my MDY trade, it was that TLT rallied $2.52 while I was (and still am) short 700 shares. I have a firm belief that TLT will fall this year and I continue to believe it’ll be sooner than later. Thankfully, TLT gave back some of its gains from yesterday which gave me an opportunity to sell new covered puts for April, assuming my seven TLT March $127 covered puts expire worthless tomorrow. I don’t think TLT will fall more than $3.50 by tomorrow’s close, so I entered two different limit orders to get a trade to hit on a move in either direction. I entered a limit order to sell three naked calls at the April $134 strike, based on the belief that any push above $135 ($134 + my $1.10 premium) will be short-lived. This order hasn’t hit yet, but my other order did hit.
While TLT was trading at $130.58, I sold seven TLT April $128 covered puts for $1.25 each and received $872.03 after paying $2.97 in commission. I didn’t want to have to raise my strike $1 compared to my March puts, but decided it would be OK after taking a full profit tomorrow on my March puts. (I’m making an assumption that nothing insane happens over the next eight trading hours.) Thanks to my March puts, I already have that extra dollar of profit locked in and could use the extra premium in case TLT doesn’t drop by next month’s expiration. The difference between the two strikes is approximately what I’ll have to pay out in dividends at the beginning of April since I’m short 700 TLT shares.
If TLT does close below $128 at the April expiration, I’ll have an extra $2.58 from the price drop on top of the $1.25 in premium. Added together, I’ll gain $2,681 from the current TLT price. If TLT doesn’t hit my puts’ strike, I’ll keep selling monthly covered puts until it works out. If I can net $500 per month each month from premiums, minus dividends paid out, I could make as much as $6,000 on TLT this year. My total could be more or less, depending on my final closing strike that’s assigned and if I add any more short shares on future naked call trades that are assigned.
In addition to the trades above, I also updated a limit order to close my UWM naked puts before I started to write this entry. Just before I wrapped up my writing today, while UWM was trading at $97.81, I bought to close two UWM April $75 naked puts for $0.15 each and paid $29.88 after received a $0.12 commission rebate. I was planning to raise my limit order to $0.20 tomorrow if my current order didn’t hit, but it did and I’m out of UWM. I’ll get back in tomorrow or early next week most likely. Well, at least I’ll enter new limit orders, but don’t know if they’ll hit.
By closing these two UWM puts, I’ll miss out on 0.19% in upside potential over the next four-plus weeks. Annualized, I’m giving up 2.28%. Obviously, this was an easy decision to make. Yesterday, I tried to get out for $0.10, but the order didn’t hit, which is why I raised my limit by a nickel today. I’ve started to enter closing orders, good-til-cancelled (GTC), soon after my initial trade on a lot of these options. I make regular reviews of my open positions and enter orders at $0.10 to $0.20 GTC, just in case I can get out early for a few bucks. Exiting UWM a month early for $15 per contract means I can sell new puts farther out on the calendar that should earn more over the next few weeks.