I had some time to look over my holdings yesterday and really think about what I wanted to do next. I only have two February puts expiring (FB and BA) and both are far out of the money. I also have 700 shares of TLT that I’m short with three more TLT February $130 calls I’m short and a hedge over both of these with 10 TLT February $132 calls I’m long.
TLT was an easy decision. I have my hedge in place for another two weeks and I’ve been making money almost every day this month. Since I think TLT has more room to the downside, I knew I wanted to stay short the 700 shares that were assigned. I briefly thought about selling out of the money puts on TLT, but decided to stay short without “covered puts” for now and entered a limit order to buy my 700 shares back at $25.40. I thought about selling my long TLT $132 calls to bring in another ~$500, but decided the hedge was a smarter move since we could see a reversal on any stupid rumor or worthwhile scare.
Without my TLT stance changing, I moved my focus to my equities. My February FB and BA puts looked safe enough. FB has been sliding since before Christmas, but I figured I could wait longer before closing my put, although it’s premium was cut in half today, so I might exit this week. BA was so far out of the money that I’m not even going to bother buying it back. Assuming these two puts aren’t assigned, I could see I was going to have a good bit of cash to work with. Even looking out to March, my DIS $95 strike put was getting cheap and was $7 out of the money. I decided that I could make a safe assumption that my DIS March $95 put won’t be assigned. If it is assigned, I won’t be upset about buying DIS that far below its recent high.
Based on my belief that I’ll soon have around $40,000 to work with, I decided to place a couple of limit orders for new positions. My first order was for IWM, but it didn’t hit until after my second order that I entered, on DIS. Within the first 20 minutes of trading, while DIS was trading at $101.34, I sold one DIS April $105 naked put for $5.10 and received $509.27 after paying $0.73 in commission. As of 2:30, this is still the high trade of the day. I used to trade with more patience and place orders like this that would hit on little weakness. I need to get back to making this part of my regular strategy because I was able to get an extra $0.45 over the premiums I would’ve earned at market prices yesterday when I entered the order.
My theory with DIS is the same as it’s been since I started selling puts on it a while ago. It’s a cash cow with huge movies in the pipeline for the next few years. Surprise blockbusters, such as Frozen, are just a bonus. I usually sell out of the money puts on it, but decided I needed to give myself more upside potential so I don’t keep missing out on such steady growth. I increase my chances of taking an option assignment, but I’m fine with that since I plan to stick with DIS through this year, if not next year too. Selling in the money puts is closer to buying the shares in that the upside potential is bigger and the downside buffer is smaller, but there is a little breathing room to the downside and I like that compared to just buying the shares outright.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $509.27
- Potential return: 5.1{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}, 27.61{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} annualized
- Breakeven price: $509.27
- Downside protection: 1.41{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}
- Recent high: $102.98 on 2/6/15
- Cushion from recent high: 3.87{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}
- Expected support: DIS gapped higher on February 2, after its earnings announcement. I could see DIS filling this gap and coming back down to its low from February 2, just below $99.00. If DIS takes another week to touch this point, it’ll encounter its trend line of higher highs that held it back through before this latest move higher. I don’t think DIS will move below $99.00 and that’s why I was more aggressive with this trade. If it does fall further, $95.50 could work as support since that’s the previous top of the trading channel DIS hit a few times.
- Position close goal/limit: I’m going to try to stick with this position through an assignment, unless some bad news hits the wires. It would have to be some type of black swan event to make me question DIS’ long-term prospects.
After lunch, my new IWM order hit. While IWM was trading at $118.95, I sold one IWM April $119 naked put for $4.25 and received $424.27 after paying $0.73 in commission. The premium I received was about $0.30 more than I would’ve received if I placed a market order yesterday instead of this limit order. Basically, between these two orders, I made an extra $75 in premiums for being patient. This IWM put traded as high as $4.34 after my order hit, but it’s moving closer to $4.00 now.
I already have some small-cap exposure through two UWM April puts, but that was my only small-cap allocation (and more than 20{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} out of the money) and I figured I needed more. IWM finished 2014 at $119.63. I expect the Russell 2000 (small-cap index) to finish higher in 2015, so selling a naked put on an index ETF with an extra 4{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} cushion below that mark seems like a reasonable risk to take. We’re getting past the best time for small-caps (December-January), but April has a good record too. I wanted to be more aggressive before the summer months hit and while IWM was still finding its footing. After a subpar 2014, I think IWM will find a time to move higher this year. Getting in on a dip, essentially at the money, made this trade feel worth the risk.
IWM Naked Put Risk/Reward Breakdown
- Potential profit: $424.27
- Potential return: 3.70{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}, 20.24{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} annualized
- Breakeven price: $114.76
- Downside protection: 3.52{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}
- Recent high: $121.41, hit on December 31, 2014
- Cushion from recent high: 5.48{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}
- Expected support: IWM has flirted with $118 this week, but hasn’t close below its 10-day moving average since February 2 when it bottomed at $114.39. This $114.20 – $114.39 area has been support this year and I expect it to hold in the coming months with IWM’s 100 and 200-day moving averages passing through there now. Any new trips below $116 should be brief, if they happen at all.
- Position close goal/limit: As my main small-cap trade that stands much of a chance of being assigned, I’m willing to take an assignment on this option and ride it out as part of a balanced allocation. I’d be much happier to pocket a 3.70{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} gain in nine and a half weeks, but I’m willing to take some short-term pain for the longer-term gain.
