Yesterday, I mentioned my plans to roll my Apple ($AAPL) naked put from October $160 to December $160. Luckily, I was alert this morning premarket and saw AAPL futures were lower. I raised my limit order to see if it would hit at a much higher premium, but even before the market opened, I was eyeing the lower strike for December. Once I saw the option contracts price at the open and my changed order didn’t hit, I decided to cancel my first order and replace it with a lower strike for December.
While AAPL was trading at $156.36, I bought to close my one AAPL October $160 naked put and sold to open one AAPL December $155 naked put. I received $157.80 after paying $2.20 in commission for the diagonal calendar spread. I had to pay $3.58 plus $1.09 in commission to close the October contract and received $5.18 minus $1.11 in commission for the December contract. If you take a look at the math on the October strike, you’ll see I had negative time value in the October contract. More exactly, if there was no time value in the October contract, it should’ve priced at $3.64 ($160 – $156.36) instead of $3.58. It looks like I really just received a gift, but I assume I paid more for my December contract than I should’ve. By the time I looked back at the December $155 prices, the price for AAPL had moved again and what I was seeing was irrelevant to what the bid/ask were when my limit order hit.
I received $549.31 net from selling the October contract back on August 16. After paying to exit early today, I had a realized gain of $190.27. That’s nothing to brag about, except AAPL’s stock price dropped from $160.56 when I opened the trade down to $156.36 when I closed it. That’s a drop of $4.20 in the stock and I still made a profit. This is the main reason I like to sell naked puts. You don’t have to be correct in the direction of the stock’s (or ETF’s) price to make money as long as the incorrect price movement isn’t too big.
I was tempted to play it aggressively and stick with the December $160 strike, but I’m set up to earn 3.45% from this trade (21.36% annualized) and have a 4.18% cushion before I lose a penny. I see no reason to take bigger risks when I can earn that good of a return with less risk. The drop in AAPL’s price is mainly due to reports of weaker than expected iPhone 8 sales. However, I view it as a strength since it likely means more people (like me) are waiting for the iPhone X. Apple has better margins on the X and we’ll probably see record numbers of iPhones sold at the new crazy price. It might not all hit in the fourth quarter since it seems they are having production delays on the X, but I expect the newest iPhone to have legs as more people get iPhone envy once they start shipping and fixing problems with production.
You can find my trade video on YouTube here.