Option Investor

Option Writer Portfolio - July

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Since the beginning of the year the Russell 2000 has been trading in a steady range while the Dow Jones Industrials and the S&P 500 have been trending down. We are selling the Russell 2000 Proshares Ultra (symbol: UWM). The Ultra means leverage to the tune of 2 times the approximate daily movement of the Russell 2000 (symbol: $RUT).

The option we are selling is the July 47 Put at approximately $1.00 per contract. There are 46 contracts open interest and no volume today as of yet. The next support is from Friday's low at $51.45. We could sell the 50's if we want to be more aggressive here. The 50s are shown below.

Notice that the Max Return on the 50 strike is only a little greater than the 47 strike. That is because of the amount of margin required to sell only $2.40 out of the money is greater than selling $5.40 out of the money. See the chart below. The index is below the 50 and 200 day moving averages. For the risk capital needed I like the return and room on the 47 strike.

Risk Management for UWM
Strike Stop = $ 50.00
Cost Basis Stop = $ 48.05
Technical Stop = $ 47.00

Notice the $48.10 horizontal line is right at the Cost basis stop level. The line represents the level the market needs to pull down to in order to fill in the gap from April. The lows on April 14 - t5th are at $47 and represent the technical stop level. Good luck trading.

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