My account is getting to the point where I start to get nervous. I’ve already hit my goal for the year. My balance broke above $110,000 this morning and I’m worried a correction is due. On the other hand, we just saw a slight retracement in the indexes and thanks to my two hedges and the rest of my out of the money options, I barely saw a change in my account balance.
I saw one of my June options was really cheap after two days of higher prices and decided it might be the right time to roll the contracts farther out and higher. I was able to improve my potential return and reduced my risk at the same time. Trades like this are easy decisions.
While IWM was trading at $125.98, I bought to close two IWM June $122 naked puts for $0.20 each and sold two IWM June $124 naked puts for $2.97 each. I received $551.57 after paying $2.43 in commission. My limit order was for $2.77 and it hit within a minute of my order going through. I was able to raise my potential return from 5.91% annualized to 12.24% annualized. My cushion went from 3.31% to 3.92%. I thought about rolling up to the $125 strike, but the summer months aren’t always the most friendliest to small-caps and I wanted the extra 0.5% in cushion that I kept with the $124 strike. I don’t need to push for too much extra risk when my main goal for the year could end up being preservation more than growth.
I have one more IWM put that expires next week. It’s at the money now with a $126 strike. It’s still trading around $1.03, so I’m going to let it run through next week or at least until there’s not much time value left versus what I can roll it out for. The rest of my June options are looking pretty good too. I’d like to roll my DIS put early if possible, but it’s only about $0.75 out of the money and the premium’s time value will melt quickly in the coming days.
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $592.77
- Potential return: 2.45%, 12.24% annualized
- Breakeven price: $121.04
- Downside protection: 3.92%
- Recent high: $127.13 on 4/15/15 (approaching a retest soon)
- Cushion from recent high: 4.79%
- Expected support: The 10-day moving average is at $124.97, the 20-day moving average is at $124.70, and the 50-day moving average is at $124.40. Any one of these could provide some support, but the more likely support area is closer to $124.15 (and rising). This point marks the rising trend line of higher lows that started just a few weeks ago. A longer-term trend line of higher lows is closer to $123.00, close to the 100-day moving average. As long as one of these trend lines hold support, my trade will stay profitable.
- Position close goal/limit: I’m still long two IWM January $124 puts, so these two new puts are not really “naked” puts, although I would be willing to take an assignment. I want to keep some small-cap exposure and buying 200 shares on an option assignment would keep me within my plan.