After the last options expiration, I planned to jump right back into naked puts on ADI and FEZ, but I got caught up on working other accounts and this one was pushed to the back burner until today. The good news is that FEZ dropped nearly a dollar and a half from its intraday high on Tuesday. Waiting another three days helped me use a lower strike and get a better premium to further reduce my risk. Now, I just have to hope the price decline was short-lived and my little trade works out. While FEZ was trading at $40.40, I sold one FEZ July $40.00 naked put for $1.03 and received $102.33 after paying $0.67 in commission.
The sharp decline in FEZ’s price might make my decision to try to catch this falling knife a bad idea, but I expect support to surface soon. The trend line I drew using the intraday lows from February 9 and March 23 is currently around $39.87 and ascending. I’m banking on it holding support and if it doesn’t, I don’t think it’ll fall below $39.19, the March 23 low. My cost per share will be $38.98 if assigned, so I even have some room for error if my predictions aren’t completely accurate. If FEZ doesn’t drop more than 0.99% more, I’ll make a full profit. It can fall as much as 3.52% before I take a loss. If FEZ fell that much, it would be 6.75% below its intraday high from three days ago and I don’t think it’s going to stay on that path lower. If FEZ remains above $40, I’ll earn a 2.63% gain, 16.86% annualized. With only $3,900 at risk on this trade, I might enter another order at the same strike at a higher premium to see if I can catch a dip or at least lower my average cost some more.
ADI came off its high from earlier in the week too, but I didn’t catch the bottom in it. Yesterday would’ve given me a better return, but today’s trade is good too. While ADI was trading at $94.94, I sold one ADI July $92.50 naked put for $2.30 and received $229.76 after paying $0.24 in commission. ADI is close to the top end of its trading range from the past six months, so I didn’t want to sell the put at the money. I felt I needed the extra breathing room for it to bounce around and possibly even come back into the upper $80s before rebounding.
Even with my ADI naked put being almost $2.50 out of the money, I could still earn 2.55%, 16.35% annualized, if it doesn’t drop more than 2.57%. ADI can fall 4.99% before I lose any money, which is a decent buffer from taking a loss on the ebb and flow of the stocks normal movements. My cost per share would be $90.20 if the option is assigned. I don’t think ADI will fall below $87.50 based on the trend lines I’ve drawn. Actually, I don’t think it’ll fall below $89.00 in the near-term. I believe in the longer-term outlook for the stock, so a temporary paper loss wouldn’t scare me out of the stock unless the story changes.