When TLT started its steep decline last week I started to get comfortable with the idea that my short position would finally be closed at next week’s May option expiration. I’m short 700 shares of TLT and have covered puts at the May $128 strike and naked puts at the May $134 strike. While it’s possible for TLT to rally $1 a day for the next five days on top of today’s $1 (so far) move, I don’t think it’ll happen. If it does, TLT shouldn’t be far above $128 and I’ll be able to write new June covered puts at a great premium.
Based on my continued bearish outlook on TLT, I started eyeing new naked calls to sell for the June expiration. As much as I don’t expect TLT to get above my $128 May puts, I am even more confident that my TLT May $134 naked calls won’t come back into play. On Monday, when TLT rose at the open and then faltered, I thought we might get another day like that before long and entered a limit order to catch the morning spike. For the next couple of days, I saw the order slip away from me as TLT slid further. Then it moved higher yesterday and opened even higher this morning.
My order hit just a few seconds after the market opened. While TLT was trading at $123.40, I sold 10 TLT June $128 naked calls for $0.85 each and received $842.06 after paying $7.94 in commission. I used a lower strike this time because I’m more comfortable with TLT not hitting the upper $130s again any time soon. Selling naked calls at $128 is the same as being short shares and selling covered puts at $128. If TLT stays below $128, I’ll have limited profit, but if it climbs, I’ll have virtually unlimited downside. It’s a calculated risk that I believe falls heavily in my favor.
I’m writing this close to 1:00 pm and TLT has risen back up to $128.36 after it fell to $122.79 mid-morning. The premiums have come back some, but my options are only at a $0.70/0.75 bid/ask. That shows what the initial fear did at the open for me to get such a good premium. This is an excellent example of why I like to use limit orders when I have the luxury of being patient. Any time you can let the order come to you, at the risk of missing out, you stand to come out much better when you time the ebbs and flows of the underlying’s price right.
This option traded as high as $0.93 a little later, but I’m still very happy with the order. I might have chickened out and not made the trade if I saw TLT up so much in pre-market. That concern didn’t factor in with the limit order in place.