Sold an IWM Naked Put

I felt like I was in the catbird seat watching stocks fall over the past few weeks. I only had one naked put on QQQ and five naked calls on TLT. Both are in the money and likely to be assigned, but even if these options are assigned, I still have a lot of dry powder on the side to buy in at cheaper prices and ride the recovery back up.

I decided to take my first nibble today when it looked like we’d get our first two back-to-back days higher in over a month. I don’t know if this is a bottom or just a dead cat bounce, but I believe selling a put at these levels has limited risk.

While IWM was trading at $111.26, I sold one IWM May $110 naked put for $8.70 and received $869.38 after paying $0.62 in commission. IWM had a recent intraday low of $95.69 last week and could retest that level again. If so, I could have a temporary loss on my trade. I have 8.95% of downside protection before I take a loss, but we’ve seen that much of a drop in a single day, so I don’t put too much weight into that. What I do like and what made me pull the trigger today is how far down IWM is from its all-time high. IWM hit $170.36 in January. If my naked put is assigned, I’ll be buying my shares 40.53% off the highs when I factor in the premiums I received.

I’ve never seen a bear market that a trader would regret buying while it was 40% down, given a few years to recover. I don’t think it’ll take more than six months to get a firm foundation under the market’s feet and probably much less time than that. More than a firm foundation, I think stocks will be much higher in six months and definitely over the next year or two.

If IWM stays above $110 by expiration, I’ll earn 8.58%, 59.50% annualized. I only sold this one put for now to see if we get more weakness that will allow me to get in with a cheaper strike on other ETFs or stocks. Anything I buy (or sell a put on) will have the outlook that it can be a long-term hold if we see stocks drop another 20% before we truly find a bottom. I also have a limit order in place to sell more TLT naked calls if we get another price spike. I’m not being aggressive with it, so it isn’t highly likely to come into play.