The Money Tree

Safely Generating Income in Retirement

New Naked Put Trades

Posted by mounddweller on May 25, 2010

All,

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.

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11 Responses to “New Naked Put Trades”

  1. dealmakr said

    Hi Troy,

    Stumbled upon your blog from Ron’s site am currently reading his book Show Me the Money. I have been trading options well before the days of the internet and am always looking to become a better trader, that journey never ends. Currently run a small investment partnership and write many options contracts per month, covered calls and naked puts & calls. My trading style is similar to what Ron has written in his book and have done many of the same types of trades described. One of the key things that I want to try is his software Visions. It looks like a super tool that can save me hours of time by scanning the market for setups. I use the cash in the accounts to backstop naked puts and with a margin account you can obtain a lot of leverage, but you have to have the disipline to act if the market goes against you. Good luck with your trading, here are some positions that I currently have open;

    Short BRCD Jun 6 Call (long stock so covered)
    Short BRCD Jun 5 Put
    Short GE Sep 12 Put
    Short GE Dec 7.5 Put
    Short GE Jan 7.5 Put
    Short BAX Nov 37.5 Put
    Short SPWRA Sep 7.5 Put
    Short DELL Nov 10 Put
    Short WFR Jul 13 Call (covered call)
    Short WFR Jun 9 Put
    Short WFR Jun 11 Put
    Short WFR Jul 12 Put
    Short WFR Jul 10 Put

    I do trade around positions and may close before expiration and you have to be comfortable with what you trade.

    • dealmakr said

      Hi Troy,

      A few of the things that I look for are for writing puts;

      Large specific company related sellofs resulting in everyone falling out of love with the stock. You can see the charts on BAX & WFR from the last earnings reports to see what I mean, these stocks get revalued and oversold quickly. Not biotechs getting a pounding from not getting a drug approval, but more solid companies who’s earnings history can be researched better. Companies also have to have a good bit of cash laying around like WFR that announced a buyback last week, didn’t help the stock too much, but will give it some time to see if the new direction for the company bears fruit.

      Companies that are trending in a range like GE. With GE a bellweather stock for the overall market, its going to go in the general direction of the market trend. During the stock purge of 2009 when GE traded down to 6, I bot the stock and missed the later runup by writing cc’s against the position too close to where the stock was purchased. Even with the market not looking so hot now, getting paid to write puts for GE @ 12 & 7.5 is a risk that I am willing to take as the returns on margin are fairly substancial. This doesn’t mean that if things go to hell in a handbasket the position won’t be covered.

      In writing naked puts, they all don’t work out. Look to see decent balance sheets,insider sales data,dividend history,earnings reports,reading SEC filings like the 10Q and 10K along with the 14 can give a bit more info on management thoughts, to give you more info on making a decision on opening a trade and at what level.

      I also tend to put on more trades as volatility increases. In writing puts, you have to go against the crowd and sell them with the stock going down to take advantage of the volatility. If there isn’t much time remaining before an expiration, I will also open more positions that I hope can expire worthless nearer where the stock is trading in its range. TA also comes into play in determining these levels of trading ranges for the specific stocks, but TA can be blown out by increased volatility in the overall market when things get hammered, so FA (fundamental analysis) has to have a role there also in separating the wheat from the chaff, in not getting put some lemon of a company.

      regards,

      dealmakr

  2. mounddweller said

    Dealmakr,

    Thanks for posting a comment and sharing some of your current positions. I would enjoy hearing more about your methodology and criteria for selecting and entering NP trades.

    I wholeheartedly endorse Ron’s VISIONS software. I’ve been using it for a couple of years now and my results have improved significantly. If you’ve been to his web-site then you’re probably already aware of his free 21-day trial.

    Regards,
    Troy

  3. mounddweller said

    dealmakr,

    We share some common investing traits. I, too like to sell NPs on solid companies that drop on bad news.

    I think we may have just such an opportunity in some of the oilfield services stocks. I don’t think we’ve hit bottom yet but I’m keeping my eye on them. In particular I like ESV. Very strong balance sheet. I think people are selling them indiscrimately. Just because OBAMA has declared a moratorium on new drilling permits in the gulf doesn’t mean the rest of the world is going to follow in his footsteps. People are forgetting most of these companies are large multi-nationals that provide services in many places besides the gulf. Also, need to keep long-term perspective. Who, in their right mind, thinks we’re going to permanently stop drilling in the gulf? We need the oil. Where else are we going to get it; from the Iranians?

    Sorry, didn’t mean to run down a rabbit hole. Anyway, I like your BAX idea. Am going to add that to my watch list. Also, I’ve traded WFR before. I have another investing friend who trades it very frequently and does very well with it.

    Regards,
    Troy

  4. dealmakr said

    Hi Troy,

    Here are my open options positions as of 06/04/10

    Short DELL Jun 12 Put
    Short DELL Jul 12 Put
    Short DELL Nov 10 Put
    Short GE Sep 12 Put
    Short GE Dec 7.5 Put
    Short GE Jan 7.5 Put
    Short BAX Nov 37.5 Put
    Short SPWRA Sep 7.5 Put
    Short SPWRA Dec 5 Put
    Short BRCD Jun 6 Call (covered call)
    Short BRCD Jun 5 Put
    Short BRCD Oct 6 Put
    Short CLF Jun 40 Put
    Short CLF Oct 25 Put
    Short CAT Jun 50 Put
    Short CLDX Jun 7.5 Call (covered call)
    Short CLDX Jun 5 put
    Short WFR Jul 13 Call (covered call)
    Short WFR Jun 9 Put
    Short WFR Jun 11 Put
    Short WFR Jul 12 Put
    Short WFR Jul 10 Put

    Lots of volatility to open a few more puts, but the market is very jittery now and positions can be adjusted at any time. I am still following ESV and others in the sector, but haven’t opened any plays there yet.

    Good Trading,

    dealmakr

  5. mounddweller said

    dealmakr,

    I like your list. I especially like WFR. They are very close to trading at book value. My only concern with them is that it might take the rest of the investment community a few years to realize the value management is creating by buying these other solar companies. I also like BAX.

    Check out APOL and let me know what you think. The JUL puts are trading at substantial premiums. However, the company is due to announce quarterly earnings after the market closes on Wednesday, June 30th.

    Regards,
    Troy

    • dealmakr said

      Hi Troy,

      APOL isn’t one that I would play as the business model for a lot of these sector companies could be in trouble. The government is looking at the whole student loan issue with respect to the fees and interest rates charged, too much risk in that one for me. I did write some PFE Jun 14 puts yesterday @ .13 div yield nearing 5% and even though problems coming next year with Lipitor coming off patent, may be one to trade around, will probably add to position over next few days looking hopefully for a bingo, but this market is very tough. CLDX got hit after the ASCO conference even with good results in the data wrote more Jun 5 Puts some Jul 5 Puts and Aug 2.5 Puts.

  6. mounddweller said

    dealmakr,

    Can’t disagree with you regarding the issues facing APOL and the other players in that industry, like CECO. However, the premiums are enticiing. Definitely would stick with the near-month puts if I decided to trade APOL.

    I’ve also traded PFE before but didn’t have much success. Think it had more to do with my strategy and timing than with the stock. I’ve got a couple of other investing buddies who love to trade PFE.

    My NVDA trade is getting hit hard today. If it keeps falling like it is today I may need to roll it out to JUL before JUN expiration. Just have to wait and see. It’s fallen quite a bit in the past couple of weeks so it is due for a bounce. Not worried long-term about it. It’s sitting on over $3.00/share in cash. If necessary will keep rolling the puts out until it either (1) begins to recover, or (2) I exhaust the ability to rollout for a credit, in which case I will accept assignment and sell CCs.

    Regards,
    Troy

    Regards,
    Troy

  7. dealmakr said

    Hi Troy,

    Here are my open options positions as of 06/11/10

    Short DELL Jun 12 Put
    Short DELL Jul 12 Put
    Short DELL Nov 10 Put
    Short GE Sep 12 Put
    Short GE Dec 7.5 Put
    Short GE Jan 7.5 Put
    Short BAX Nov 37.5 Put
    Short SPWRA Sep 7.5 Put
    Short SPWRA Dec 5 Put
    Short BRCD Jun 6 Call (covered call)
    Short BRCD Jun 5 Put
    Short BRCD Oct 6 Put
    Short CLF Jun 40 Put
    Short CLF Oct 25 Put
    Short CAT Jun 50 Put
    Short CLDX Jun 7.5 Call (covered call)
    Short CLDX Jun 5 put
    Short CLDX Jul 5 Put .65
    Short CLDX Aug 2.5 Put .10
    Short PFE Jun 14 Put avg .14
    Short AZO Jun 195 Call
    Short AZO Jun 165 Put (strangle written for 1.4 credit)
    Short WFR Jun 12 Call .07 (Covered call)
    Short WFR Jun 9 Put
    Short WFR Jun 11 Put
    Short WFR Jul 12 Call .32
    Short WFR Jul 12 Put
    Short WFR Jul 10 Put
    Short WFR Oct 6 Put .20
    Short WFR OCt 13 Call .55

    Here is a log of how I have been trading WFR that I post updates on Silicon Investor if you want to see the ebb and flow of the position.

    Opening position WFR updated 06/11/10

    05/03/10 Bot 2500 WFR 13.19
    05/03/10 Sold 25 May 13 Call .73 corrected
    05/03/10 Sold 25 May 12 Put .23
    05/03/10 Sold 25 Jul 12 Put .76
    05/04/10 Sold 25 Jun 13 Call .80
    05/04/10 Sold 15 May 12 Put .43
    05/05/10 Bot 2500 WFR 12.60
    05/05/10 Sold 25 Jun 15 Call .31 corrected month
    05/05/10 Sold 25 May 11 Put .15
    05/05/10 Sold 25 Jul 10 Put .33
    05/06/10 Sold 30 Jun 13 Call avg .675
    05/06/10 Sold 15 Oct 9 Put .60
    05/06/10 Sold 15 Oct 9 Put .75
    05/06/10 Sold 15 May 11 Put .33
    05/07/10 Sold 15 Jul 14 Call .60
    05/07/10 Sold 15 Jul 10 Put .65
    05/07/10 Bot 1500 WFR 11.60
    05/10/10 Sold 25 May 11 Put .15
    05/13/10 Sold 25 Jun 11 Put .31
    05/14/10 Sold 25 May 11 Put .13
    05/14/10 Sold 25 Jun 12 Call .70
    05/14/10 Sold 10 Jul 10 Put .50
    05/14/10 Sold 25 Jul 13 Call .60
    05/18/10 Sold 25 Jun 12 Call .54
    05/25/10 Sold 50 Jul 13 Call .28
    05/25/10 Sold 25 Jun 9 Put .16
    06/07/10 Sold 25 Jul 12 Call .32
    06/08/10 Sold 50 Jun 12 Call .07
    06/08/10 Sold 25 Jun 9 Put .15
    06/08/10 Sold 25 Oct 6 Put .20
    06/08/10 Sold 10 Oct 13 Call .55

    Closed trades Profit or loss

    05/07/10 Bot close 25 May 13 Call .29 1100
    05/10/10 Sold 1500 WFR 12.40 1200
    05/10/10 Bot close 25 WFR Jul 15 Call .23 200
    05/10/10 Bot Close 30 WFR Oct 9 Put .57 320
    05/10/10 Bot Close 40 WFR May 12 Put .44 (540)
    05/14/10 Bot Close 25 WFR Jun 13 Call .39 1025
    05/18/10 Bot Close 15 WFR Jul 14 Call .26 510
    05/18/10 Bot Close 30 WFR Jun 13 Call .27 1210
    05/20/10 Bot Close 25 WFR Jul 13 Call .52 200
    05/20/10 Bot Close 90 WFR May 11 Put .40 (2030)
    05/24/10 Bot Close 50 WFR Jun 12 Call .33 1450
    06/08/10 Bot Close 50 WFR Jul 13 Call .14 700

    Total return P/L on closed trades 5345

    Total position Cost / Premium received

    Long 5000 WFR avg 12.89 (64450)
    Short 50 Jun 9 Put 775
    Short 25 Jun 11 Put 775
    Short 50 Jun 12 Call 350
    Short 25 Jul 12 Call 800
    Short 25 Jul 12 Put 1900
    Short 50 Jul 10 Put 2300
    Short 25 Oct 6 Put 500
    Short 10 Oct 13 Call 550

    Net position exposure

    Covered calls 5000 shares
    Naked Calls 3500
    Naked Puts 17500 shares

    Stock closed at 10.78 so position bot now back to avg cost of 12.89 is underwater by 2.11/share. No further stock trades will be listed unless as a result of exercise or assignment. Company announced they resumed their stock buyback, but didn’t help things much with the stock trading into the 9’s last week. A few large options trades of 5k each made it look like someone was hedging possibly company using them for buyback, so decided to add a few more to the position. Will see how expiration goes next week with large OI on the call side near the money.

    Good Trading

    dealmakr

    • mounddweller said

      dealmakr,

      Thanks for sharing your trades! Always enjoy reading and learning from what others are doing in the market. I found your WFR trade particularly interesting as I have another investing buddy who also has a sizable position in this stock. I just ran my initial scan on possible JUL NP trades. A couple of your existing trades showed up on my screen: SPWRA & CLF. I am considering trading the CLF JUL $45 and/or $44 NPs.

      Regards, Troy

  8. dealmakr said

    Hi Troy,

    Looks to be a decent expiration in writing NP’s. Covered the SPWRA Sep 7.5 puts for .14 and am looking now to initiate new Jul & Aug options positions in CLDX & BRCD. CLF reports earnings in July and with options expiring on Jul 17 may not have an impact, will be looking for a NP entry soon. Here is an update on my WFR position.

    Opening position WFR updated 06/18/10

    05/03/10 Bot 2500 WFR 13.19
    05/03/10 Sold 25 May 13 Call .73 corrected
    05/03/10 Sold 25 May 12 Put .23
    05/03/10 Sold 25 Jul 12 Put .76
    05/04/10 Sold 25 Jun 13 Call .80
    05/04/10 Sold 15 May 12 Put .43
    05/05/10 Bot 2500 WFR 12.60
    05/05/10 Sold 25 Jun 15 Call .31 corrected month
    05/05/10 Sold 25 May 11 Put .15
    05/05/10 Sold 25 Jul 10 Put .33
    05/06/10 Sold 30 Jun 13 Call avg .675
    05/06/10 Sold 15 Oct 9 Put .60
    05/06/10 Sold 15 Oct 9 Put .75
    05/06/10 Sold 15 May 11 Put .33
    05/07/10 Sold 15 Jul 14 Call .60
    05/07/10 Sold 15 Jul 10 Put .65
    05/07/10 Bot 1500 WFR 11.60
    05/10/10 Sold 25 May 11 Put .15
    05/13/10 Sold 25 Jun 11 Put .31
    05/14/10 Sold 25 May 11 Put .13
    05/14/10 Sold 25 Jun 12 Call .70
    05/14/10 Sold 10 Jul 10 Put .50
    05/14/10 Sold 25 Jul 13 Call .60
    05/18/10 Sold 25 Jun 12 Call .54
    05/25/10 Sold 50 Jul 13 Call .28
    05/25/10 Sold 25 Jun 9 Put .16
    06/07/10 Sold 25 Jul 12 Call .32
    06/08/10 Sold 50 Jun 12 Call .07
    06/08/10 Sold 25 Jun 9 Put .15
    06/08/10 Sold 25 Oct 6 Put .20
    06/08/10 Sold 10 Oct 13 Call .55
    06/15/10 Bot 1000 WFR 11.50
    06/15/10 Sold 25 Oct 13 Call .85
    06/15/10 Sold 15 Oct 9 Put .50

    Closed trades Profit or loss

    05/07/10 Bot close 25 May 13 Call .29 1100
    05/10/10 Sold 1500 WFR 12.40 1200
    05/10/10 Bot close 25 WFR Jul 15 Call .23 200
    05/10/10 Bot Close 30 WFR Oct 9 Put .57 320
    05/10/10 Bot Close 40 WFR May 12 Put .44 (540)
    05/14/10 Bot Close 25 WFR Jun 13 Call .39 1025
    05/18/10 Bot Close 15 WFR Jul 14 Call .26 510
    05/18/10 Bot Close 30 WFR Jun 13 Call .27 1210
    05/20/10 Bot Close 25 WFR Jul 13 Call .52 200
    05/20/10 Bot Close 90 WFR May 11 Put .40 (2030)
    05/24/10 Bot Close 50 WFR Jun 12 Call .33 1450
    06/08/10 Bot Close 50 WFR Jul 13 Call .14 700
    06/14/10 Bot Close 50 WFR Jun 9 Put .01 725
    06/15/10 Bot Close 50 WFR Jun 12 Call .09 (100)
    06/15/10 Bot Close 25 WFR Jun 11 Put .13 450
    06/15/10 Bot Close 50 WFR Jul 10 Put .23 1150
    06/15/10 Bot Close 25 WFR Oct 6 Put .10 250

    Total return P/L on closed trades 7820

    Total position Cost / Premium received

    Long 6000 WFR avg 12.66 (75950)
    Short 25 Jul 12 Call 800
    Short 25 Jul 12 Put 1900
    Short 15 Oct 9 Put 750
    Short 35 Oct 13 Call 2675

    Net position exposure

    Covered calls 6000 shares
    Naked Puts 4000 shares

    Stock closed at 11.76 so position bot now back to avg cost of 12.66 is underwater by .90/share. No further stock trades will be listed unless as a result of exercise or assignment or hedging. Stock had a decent rally from the lows of last week and I left some dough on the table by closing out the June options, but decided to take profits and reduce exposure on the put side by covering short positions into strength. Profits can be fleeting in this market and positions can be opened again depending on where the stock is trading. Too much chatter about alternative energy made exposure to having uncovered calls at this time a bit risky.

    Good Trading

    dealmakr

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