I timed my DIS trade well yesterday since DIS jumped $1.73 today, after I raised my strike $5.00. I wish I had timed my IWM trade that well too. I made the trade today, but would’ve done better yesterday, before IWM gained $1.55. Luckily, IWM continued climbing after my trade, so I didn’t catch the exact peak. My new IWM trade is only a few hours old and I’m already wondering if I should’ve used a higher strike, but it’ll be a couple of months before I know for sure.
While IWM was trading at $127.76, I bought to close my one IWM June $126 put for $0.06 and sold to open one IWM August $126 naked put for $2.73. I received $264.67 after paying $2.33 in commission for the calendar spread. Three days ago, IWM was down to $123.94 intraday and found support at the bottom of its ascending trading channel. I thought it would hit resistance at the top of its trading channel, where it opened. Instead, IWM kept climbing for three hours and then pulled back for a little while for my limit order to hit.
I placed my limit order yesterday based on late afternoon prices with the belief that today wouldn’t be a crazy day. I figured I could squeeze in more profit by letting more time value erode and would catch a trade on some intraday weakness. Since I quickly learned that plan wouldn’t play out, I lowered my limit order and let it sit. I don’t mind that I paid $6 to close the June put that’s now more than $2 out of the money, but I didn’t have to. It was just safer to leave the calendar spread in place rather than push to save a few dollars.
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $265.73
- Potential return: 2.15%, 12.05% annualized
- Breakeven price: $123.34
- Downside protection: 3.46%
- Recent high: $128.24, hit today, after my trade
- Cushion from recent high: 3.82%
- Expected support: I expect IWM will retest its trend line that used to be resistance. That should pull the small-cap ETF back down towards $127, not even a full retracement of today’s move. I’m curious if this trend line will become new support as it often does or if today was a blip and IWM will head back towards its recent trend line of higher lows, around $124.50. I think the 100-day moving average ($123.30) will hold support if IWM falls that far. I drew longer trend line of higher lows just below it that could aid in support too.
- Position close goal/limit: I’d like to be able to roll this put higher at some point, but will probably just let it run until closer to expiration to work as much time value out of it as possible. If stocks fall, I’ll be comfortable taking an assignment of 100 shares with a $123.34 cost.
I only have two options left to expire tomorrow, TLT and MDY. Both are far out of the money now and not a real risk to be assigned. I plan to sell a new MDY naked put to replace the expiring put, but want to see what the futures look like before I enter my order. I won’t be at my desk when the market opens, so I’m going to be forced into waiting for the market to come to me. I already made my new TLT trade to replace the naked calls expiring. I doubt I’ll make another trade on TLT for more than a week and then I might aim for August expiration instead of doubling up on July.