My one FB May $160 naked put is more than $25 out of the money and trading with a bid/ask of $0.02/0.03. I thought about buying it back as I rolled the contract out until July, but I opted to save $4 (including commission) and simply sell a new put rather than write this as a calendar spread combination. I’m still bullish on FB, just as I was the last time I sold a naked put on the stock in March. This time, while FB was trading at $186.56, I sold one FB July $180 naked put for $4.25 and received $424.32 after paying $0.68 in commission.
When I sold my May naked put, FB was trading at $172.44 and I brought in $4.25 in premiums then too. The stock was only a few days into its decline when I made the previous trade and volatility allowed me to sell at the same price. Now that FB has recovered and is still ascending, I had to raise my strike $20 to earn the same income. That means my return won’t be as good, but also the perceived risk is lower. The risk is actually higher now since my cushion from a loss is only 5.79% versus 9.67% last time, but with FB in the middle of a rally, it feels less. What it feels like is irrelevant, which is why I’m pointed out the difference.
If FB stays above my $180 strike, I’ll earn 2.41%, which is 12.43% annualized. I need FB to fall no more than 3.52% to allow a full profit on the trade for me. I wouldn’t be surprised to see a 3.0 – 3.5% retracement since the push higher has been so steep, but I don’t think FB is going to collapse again in the near-term. If it does, I’ll view it as a buying opportunity again.
I chose the $180 strike because it puts my cost per share if assigned at $175.76, just above the current 200-day moving average of $174.77. All moving averages from the 10-day through the 200-day are rising and each one could offer support on weakness. The 200-day moving average has been support and resistance for FB a few times since February and the 50-day moving average ($170.39 as of today) has been even more influential. I used the higher level of potential support for two reasons. First, I wanted a better annualized return. Second, if FB does drop as low as its 50-day moving average, an 8.67% decline, I expect it to reverse and only leave my option in the money for a few days to weeks.
I drew a trend line from the July 13, 2017 intraday low that touched the intraday lows on September 25, 2017, February 9, 2018, and May 1, 2018. That line is around $171 now and should provide support if my higher trend line (currently at $175) doesn’t hold support first. The higher trend line began with the intraday high from July 19, 2017 and then became support multiple times since then and was resistance as recently as March 21, 2018. I see this trend line as being an accurate trajectory of FB’s path higher and while it might lose support, I expect FB to rally back towards it.
I considered waiting for the next pull back on FB and maybe I should have, but I’m comfortable owning the stock if my timing doesn’t work out as planned. I thought the same for WMT and it has cost me roughly $2,000. I plan to exit WMT when my covered call expires or gets a little cheaper. I’m down over $1,400 on my GS naked put too, but GS has recovered substantially (up $15 from its intraday low last week), and I think I’ll be able to work my way out of it with a profit with the help of some covered calls through the summer.