We spent most of last week in New York (Manhattan) for spring break. It felt good to get back at my desk and find some normalcy in my daily routine yesterday. I made it back to my account this morning and rolled a couple of options that were set to expire this coming Friday. I had nearly all of the profit available on both options and didn’t have much to gain by letting them run for the next four days. I was able to lower my risk and increase my annualized profit potential on both. The decision to roll them to June was easy. Deciding which strikes took a little more thought.
I started with DIS. While DIS was trading at $106.72, I bought to close one DIS April $105 put for $0.16 and sold to open one DIS June $110 naked put for $5.31. I received $513.41 after paying $1.59 in commission for the two trades (placed as a single diagonal spread order). I received $509.27 for the April put when I sold it in the money two months ago, which gives me a realized gain of $492.48. Just like my DIS April naked put, I sold this one in the money again based on the idea that DIS still has good upside potential and any dip should be bought. The $105 strike was tempting. It has a potential annualized return of 14.23%, which fits my normal target range, but I wanted to push for more with this stock as a possible much longer-term hold.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $530.20
- Potential return: 5.06%, 26.87% annualized
- Breakeven price: $104.70
- Downside protection: 1.92%
- Recent high: $108.94 on 3/20/15
- Cushion from recent high: 3.89%
- Expected support: After gapping higher in early February, DIS hasn’t looked back much. I could see a worst-case scenario of a move back to the low of that gap higher at $98.85, but really expect support before then. The 50-day moving average is at $104.67 and climbing quickly. In a few days, this moving average will line up with the trend line of higher lows from the past couple of months, just above $105.00. I expect $105.35+ to hold support and that’s if the 10-day moving average ($106.09) doesn’t hold recent support.
- Position close goal/limit: I only sold one put so I would be willing to take an assignment on a decent retracement. I don’t plan to sell another put until DIS is below $105 and then I’d probably sell out of the money to try to lower my cost per share if both options were assigned.
A few minutes after my DIS trade hit, I moved on to my April IWM naked put. I knew I wanted to aim a couple of months out on the calendar, so June was an easy expiration to pick. I already have two IWM June $122 naked puts and since I have two IWM January $124/110 put spread that I’m long, I figured I could take a little more risk on my new single naked put and decided to sell a few cents in the money. While IWM was trading at $125.70, I bought to close one IWM April $119 put for $0.02 and sold to open one IWM June $126 naked put for $3.61. I received $356.81 after paying $2.19 in commission. I received $424.27 for the April put originally, which gave me a realized gain of $421.18 on the trade. I thought about letting the April $119 put expire worthless at the end of the week. After all, it was 5.34% out of the money with less than four days remaining. Instead, I decided it was better to spend $3.09 than let some black swan event come and hurt me.
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $359.90
- Potential return: 2.94%, 15.76% annualized
- Breakeven price: $122.40
- Downside protection: 2.69%
- Recent high: $126.37 on 4/13/15 (yesterday)
- Cushion from recent high: 3.14%
- Expected support: The 10-day moving average broke this morning briefly, but the 20-day moving average held support. I’d like to see IWM stay above $125 for the rest of this week to show better strength. For now, the 20-day moving average is key support at $124.69 and rising. Last week’s low of $123.78 will be the next test followed by the 50-day moving average at $122.68 (and rising). $121.54 marks the intraday low from March 26, when the small-cap ETF reversed its short-lived, sharp decline. If support doesn’t hold there, we could see another 5% lower quickly.
- Position close goal/limit: I only sold one put so I would be willing to take an assignment if IWM doesn’t bounce back within the next two months. It might not move much higher by June, but that’s not my concern since I only need IWM to gain 0.24% to take a full profit. If oil prices stay low and we don’t have a reason to believe interest rates will move higher sooner than expected, small-caps should be fine.
I just realized that when I sold these DIS and IWM naked puts for April, I did it on the same day in February as I did this morning. That doesn’t mean anything other than an interesting coincidence since both days were not expiration days.
As I was getting back into the swing of things yesterday, I noticed how TLT had melted in my favor while I was out of town. I had been watching the price occasionally on my phone, but the chart told a better story. I thought about rolling my TLT April covered puts early, but figured I could wait another day or two to see if TLT kept its slide going. Instead, TLT gained as much as 1.5% at its peak today before easing off in the afternoon. I plan to roll my covered puts and naked calls into May and will remain patient as I wait for the right trade. I’m not bothering with closing the TLT April $128 puts for $0.04 yet, because I would be very happy to have them assigned $3+ lower than the current price.