Here’s how to make the Fade the Fear Trade safer and, potentially, more risky.
IWM Sell 177 put
Non-leveraged: Sell 1 put for every $17,700 I want to invest in IWM. 1% return
i. I don’t need to get stopped out. I can let this ride. Worst case, I’m long 100 shares IWM around $177.
-Little bit of leverage: Sell 2 puts for every $17,700 I want to invest in IWM. If assigned, I have to put up 50% of stock cost. 2% return
i. I’m buying with 2 to 1 leverage. I’m fine as long as the stock price doesn’t fall too far. If it does, I may have to add more money to the account or sell after stock falls 50%.
-Risky way: Sell as many puts as you can with the $17,700. Initial Margin Requirement: $1,800. Sell 8 naked puts.
i. Sell 8 naked puts. Can only take assignment on 2 of them. I must close 6 of the 8 contracts prior to expiration if we’re ITM. Forced to take a loss.
If I’m going the risky route, I usually peel off the extra naked puts relatively quickly if things turn south.
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