I’ve had a couple limit orders for XLF naked puts over the past few weeks and finally got my latest order to hit. I placed the order yesterday afternoon when XLF was around $28.60. I expected the previous two days of price volatility to continue with XLF dipping and then recovering some before close, so I entered my order $0.06 above yesterday’s bid/ask range.
While XLF was trading at $28.41, I sold two XLF October $28 naked puts for $0.45 each and received $88.43 after paying $1.57 in commission. It’s certainly a small trade with a potential cost to purchase the shares if assigned of only $5,600, or about 5.4% of my account value. I might add two more puts if XLF drops close to $27.70 where the 50 and 100-day moving averages are converging. That range is also close to the August 15 intraday low of $27.61 that could act as support.
I don’t expect XLF to move too much to the downside in the near-term. $28.00 is probably a better area to plan for support. The 200-day moving average is at $27.98 today and slowly ascending. If XLF doesn’t find support with the 10 or 20-day moving averages, I think the 200-day moving average will work better. Even before XLF gets that low, the most important trend line I drew is the line that marks the trend line of higher lows beginning with the July 6 intraday low and touching the bottom of the trading range from August 15. This trend line is around $28.10 today and will continue raising its line of potential support a few cents each day until it breaks.
If XLF does fall below my $28 strike and I’m assigned the shares, my cost per share will be $27.41, which is 3.0% below the price of XLF when my order hit. XLF can fall 1.44% and I’ll still be able to make a full gain on the trade. If I am able to avoid assignment and take a full profit, I’ll earn 1.6% or 11.28% annualized.
After such a strong run in stock prices over the past two months, I’ll be very happy with an 11.28% annualized gain. I’m actually considering buying more puts for protection again. Nothing looks too ominous and sometimes that’s ominous by itself. The lack of fear in the market scares me. It seems everyone has decided the good times are here to stay and we all know that’s not how it works.