OAP 153: TLT Iron Butterfly & Covered Call Walk-Thru

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Assignment for some traders can be scary and cause them to freeze up or throw in the towel. On today's podcast, we'll walk-thru another case study in which we got assigned on our iron butterfly position in TLT not once, but twice. Inside I'll move slowly as we look back at each stage in the trade from the original order entry, adjustments, assignment, and ultimately the covered calls we sold after being assigned stock. This podcast is worth listening to twice!

Key Points from Today's Show:

  • On September 11, sold three iron butterflies centered at the 119 strike price. 
  • Sold the 119 calls and puts, and bought options further out on either end, 127 calls and 111 puts.
  • Collected an initial premium of 246.
  • On September 18 sold another set of three laddered entries selling the at-the-money strikes at 117. 
  • Sold the 117 iron butterfly for a 229 credit.
  • TLT dropped down from 117 to 112, getting closer to October expiration.
  • In October 10 we were assigned on all three 119 puts, leaving it in the money about $7. 
  • Decided to hold the position and roll out the 117 iron butterfly for a credit. 
  • At this point the 117 were $5 in the money and we only took a $200 credit on the original 117 position. 
  • As TLT moved down, IV spiked giving us the ability to roll contracts to the next month for a decent premium.
  • Used vertical roll order to roll out iron butterflies at 117 in two separate orders.

Adjustments: 

  • Rolled out the put side, which was the challenge side, first.
  • Closed the 117, 110 put options in October.
  • Reopened 117, 110 put spread in November for a $20 credit.
  • Rolled the 117 call spread for a $46 credit overall. 
  • On October 26, created a covered call on the existing 300 shares that we were long. 
  • Sold three covered calls at a 116 strike price for 118 for each.

Assignments:

  • On November 8th, we were assigned the additional three short put options at 117, leaving us long 600 shares.
  • On November 16th, sold another three contracts creating the covered call on the 116 options.
  • The next day, TLT started to rally and continued for many weeks. 
  • On December 4th, finally got to a place where we could exit the entire position in TLT
  • Total credits taken in at this point were $730 over all
  • Also on December 4th, we sold our covered calls for a net price of 115.55.
    — Sold back the stock for 117.77 

— Bought back the call options for $2.22.

P&L: Exiting With a Profit:

1. 119 Call Options

— Sold for a 247 credit

2. 117 Call Options

— Add the 229 credit

3. Rolled 117 Iron Butterfly

— Add a credit of 20 cents on the put side and 26 cents on the call side
— Total credit on the options contracts = $5.42 for each set of 3 contracts.

4. Covered calls for original 300 shares of long stock
— Add 118 to the credit

5. Covered calls for additional 300 shares assigned
— Add a 70 cent credit.
Total credit = $730

6. Subtract 119 and 117 from total credit for assigned shares.

— (- 228.7)

7. Both 119 and 117 covered calls were sold back for 115.55 for each set of 3. 

Total profit = $240 x3 (for every set of 3 contracts)

= $720

8. During the entire process, we got paid $242.51 in dividends as well. 

Total Profit = $962.51

Conclusion:

  • What looked like a terrible position ended up generating $720 across these two series iron butterflies.
  • Even after being assigned and having to roll and deal with covered calls and long stock, the position ended up making money because our strategy remained mechanical. 
  • This is key as you get started in trading that you have to stay diligent and systematic. 
  • Simply by holding the stock, we were able to gain two rounds of dividend payments. 
  • You can't let your emotions get the best of you.

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Free Options Trading Courses:

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Option Trader Q&A w/ Patrick

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. Today's question comes from Patrick.

My sons are starting with $1,000 this year for options trading. Which options investment strategies would you recommend that my sons start with?

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PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
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  • 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
  • VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
  • DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we'll discuss why I'm adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
  • COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
  • TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
  • MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
  • IBB Call Debit Spread (Opening Trade): We'll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
  • TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly - even still the drop in implied volatility helped generate a $330 profit for us.
  • XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
  • COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
  • EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
  • IBM Iron Condor (Earnings Trade): Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
  • SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.