The Money Tree

Safely Generating Income in Retirement

Archive for May 25th, 2010

New Naked Put Trades

Posted by mounddweller on May 25, 2010


The recent volatility has gotten me excited again about the possibility of making money selling puts.  Accordingly I spent some time this weekend looking at some possible JUN expiration trades.  I didn’t use a methodical or even
logical approach to identify potential trades.  I simply went back through my list of stocks I’d successfully traded before or stocks I wouldn’t mind owning and looked for what I thought was a fair return for the risk being taken.  For each of the stocks I identified I looked at the chart to look for areas of support.  More importantly though I looked at the risk/reward of various strike prices and their corresponding premiums.  Of course, the best tool with which to evaluate risk/reward (in my opinion) is Ron’s “Put Factor” (PF).  Using the relationship between the current stock price, the strike price, the put premium, and the number of months until expiration the PF allows you to make an ‘apples to apples’ comparison between multiple NP trades.

My initial list contained 14 stocks.  With several of the stocks on this list I looked at multiple strike prices.  Two, NVDA and EWZ really caught my eye.  Both had excellent premiums at strike prices with substantial downside protection.  Accordingly, the PF for these trades was also very high.

I used the sell-off at the opening bell today to sell naked puts on each of them.  Here’s are my trades:

(1) Sold 5 NVDA JUN $10 puts at $0.21

(2) Sold 2 EWZ JUN $45 puts at $0.67

Below is a chart which shows the parameters I was looking at when I pulled the trigger on these trades.

I think it’s pretty obvious why I liked the trades.  With NVDA I have almost 19% downside protection yet I’m earning 2.1% ROIC with only 24 days remaining to expiration.  The PF when I placed the trade was 3.28!  With EWZ I got less return (1.49% ROIC) but more downside protection.  My dowside protection with EWZ is almost 23%!  The PF was 3.10.  Both stocks ended the day significantly higher in price than they were when I sold my puts so my downside protection from here is even greater than that referenced above.

Now, a little about the two stocks on which I sold the puts.  As I’ve mentioned several times before in my blog I never sell puts on a stock that I wouldn’t mind owning.  So why won’t I mind owning NVDA and EWZ if I have them put to me?  Well, with NVDA I would be buying THE industry leader in graphics processors at a great price.  The 52-wk high is 18.96.  The 52-wk low is 9.63.

EWZ is an ETF.  It holds a basket of Brazilian stocks.  Brazil is one of the fastest growing economies in the world.  It is also one of the most resource rich countries.  It does not have the heavy debt problems that now inflict many other countries.

As this market correction continues I plan to remain on the look-out for other similar opportunities.

Posted in Troy's New Picks! | Tagged: , , , | 11 Comments »