Closed NUGT covered put (7/8 expiration, $167.50 strike)
Bought to close a covered put position originally entered on 7/6. It consisted of 100 shares of NUGT, bought back for $165.89 (originally sold short for $167.05), and 1 put contract with $167.50 strike price, expiring 7/8, bought back for $2.87 (originally sold short for $8.90). Total return after commission for the combined covered put position was $685.70, or $6.86/share.
This position was originally detailed, here. After falling hard, yesterday, NUGT was gaining strength during today’s afternoon session, reaching a high of $168.90, before falling back to close at $166.68. I gave up about $100 in profit potential by closing this a couple of hours early, but that amount didn’t justify the risk of staying in the trade.
Despite the unexpected wobble at the end, I am really happy with this trade. The risk was very well controlled, and the reward significant. After commissions, I collected more than 4% on the initial stake in just two days. Of the $6.86/share gain, only $1.16 came from the stock side, the remainder was contributed by time decay and volatility collapse. So, the keys to this trade were the following:
- NUGT combines strong liquidity and high volatility. Without those two aspects, short-term option trading would not be cost-effective, due to either wide bid/ask spreads, or limited return potential, respectively.
- The IV of NUGT was elevated well beyond its normal measure, which gave the selling of options the edge.
- NUGT was extremely overbought, when I entered the position. The most recent three daily bars were entirely outside the Bollinger Bands. This further increased the odds for some consolidation to occur, which would give the advantage to volatility selling.
This is definitely a pattern to keep on the radar.