Holding Long Stock After Assignment

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Long stock: In today's video, we’re going to go over all of the trades that we made on Wednesday, January 14th. As we get closer to expiration, it’s going to be a little bit more active. Today was pretty confident with closing out things and got a couple of assignments on some puts that we had that were deep in the money, so we’ll go over everything today.

The main story here is that as you get to expiration, this is the time of the month when you have to clean-shop a little bit. You got to take trades off that you might not want to trade, take off because they're in the money, we’re at the last week of expiration, the last couple of days of expiration, and it sometimes becomes a little bit difficult as far as timing, but unfortunately, it’s just what we all have to go through as traders.

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Let’s start off tonight by looking at the opening trade that we had in SPY. Now, we had this in two different orders. One order came over that was one contract at $27, but we got most of these at 28, so we just put the alert here at about $28 for credit. We have four of the SPY February 208/209 credit call spreads. What this means is that we sold the 208 calls and then went out and bought the 209 calls against it and took in a credit of $28 on that sale.

When we go to Thinkorswim here, this is the setup. We have the SPY that’s just been continuing to make a rounding top. I wouldn’t say it’s a major top, but it’s not showing any signs of strength. Even though it rallied today, it’s still close on the lower end of the day, about half a percent lower. And implied volatility, as a result, has seen an uptick.

We’re now in the 62nd percentile for implied volatility which means that it’s much higher than where it was yesterday, so that gives us that opportunity to sell premium. Now, because we think that maybe the market might continue to move lower, plus we just need the negative Deltas in our portfolio, we went ahead and sold the credit call spread above the market. You can see our first short strike is right here at 208 and then we went out and bought the 209s for protection.

Now, the probability of success on this trade when we entered it was about 80% because it's got about a 20% to 22% chance of being in the money at expiration, so the likelihood of SPY going from where it’s at now at about 201 all the way up to and closing above 208 is about 20%, so that gives our trade about an 80% chance of success. And on the charts here, that would mean that the S&P would have to rally and close above this level. We’re giving ourselves a little bit of room here, and we’ll continue to add trades like this to the indexes if we continue to see implied volatility rise.

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Alright, closing trades. The first one that we legged out of somewhat is TLT. We still have the main iron condor on in TLT, and we legged out of one side of this iron condor that we had in TLT, the 130/132 call spread. And the reason that we did this ahead of expiration is because bonds continue to be unyielding today and I don’t know if they’re going to maintain that strength in the next two days or not, but at this point, it’s just best to get out of this side of the trade because it is in the money and we run the risk of having an assignment like we had on X and XOP.

We got assigned both of those contracts today, and we don't want to run that risk, so we just want to go ahead and get out of that side of the trade. We did close that side at a 175 debit. After all is said and done with all the adjustments that we made to the position, we’re probably looking at a loss of about 156 assuming everything that is left expires worthless. When I go to the Analyze tab here, you can see basically what's left. And let me get the February position off here.

You can see that this is basically what's left. All I did was I closed out of this side of the trade. This side of the trade that was in the money, I closed out of that side, and basically what we’re left with is two put credit spreads below the market. Everything looks to be pretty good, the 68% probability range is right about in here, our breakevens are down around 130, so unless bonds make a really dramatic move lower tomorrow, I think we’ll be pretty good, all of these options that are left should expire worthless, we don't have to close any of those out.

Now, what’s magnificent about this is that even though we took a loss, our loss could've been around $260 from the original trade. It was a good adjustment that we made to this position because our loss is dramatically less than what it would’ve been originally, and that's why we make adjustments, to protect our losses first and reduce that risk.

The second trade that we got out of today is the Amazon put spread. Amazon has continued to move lower against this position. In midday, it was trading much lower than 290 which is our short strike here at 290. We did the same thing that we did with TLT, just on the other side. Because Amazon was trading lower, we bought back our 290/285 put spread for a 195 debit.

And after everything is said and done, the original iron condor is still working, and we should have a $50 loss overall after all adjustments. Now again, we’ll show you what the new position looks like or remaining position in Amazon. You can see it's a very, very wide iron condor. Everything is going to expire worthlessly that's left in here. But the key here is that we were teetering on edge today of either losing $50 or if Amazon traded below 290…

It rallied above it today, but if it traded below 290 and stayed there, we ended up possibly losing about $500 on this trade if we stayed into it and Amazon continued lower. I rather not take that type of risk the last day of expiration. I’m much happier to take a $50 loss on this trade versus a $500 loss. When you’re on edge like that where your position or the underlying stock is trading right at your strikes, it becomes a gamble; it becomes more of a 50-50 bet that last two or three days to expiration.

I'm more of the opinion of close out the trade, bank a small profit, bank a small loss, whatever the case is so that you don’t end up with a huge loss trying to gamble everything away. And that theme runs us right into our calendar on EEM. Our calendar in EEM was at the 40 call strikes, so we were looking for EEM to continue to move higher.

And it did move higher, but just not robust enough to make this thing worth it. What we ended up doing was again, since we’re close to expiration, we had a little profit today, so we closed it out with a $10 profit. It’s not a huge winner, but it is a winner, and it just gets rid of the position because it didn't move that much this month.

The another position that we closed out of today is in XLE. XLE was one of the hedges that we had for some of our oil positions. This one ended up nice. It was a good, good position. We did big a case study on it that we published already just about holding positions all the way through expiration because XLE was a big loser halfway through the month and basically for about a week and a half was a full loser.

But we didn't close the position, we were diligent in holding the position, letting the probabilities work themselves out over time, and you can see that we were able to buy it back today for just a $5 debit for a 222 profit, so a nice little profit on XLE. And you can see here on the charts once I bring up these charts of XLE that our position when we entered it was this day right here.

This was the day that we began our XLE position and our short strike was at 78, so our short strike was right here. And you can see that for nearly two weeks in the month, it was a full loser. It was good trading in the money, and it was losing a lot of money, but we were diligent. You got to just hold some of these positions even though it’s tough.

I know it’s tough to hold some losing position sometimes, but you just got to keep your position size small and you can hold these things all the way through expiration and finally see a profit materialize. And the reason that we closed it out today is just that we’ve got a good profit in it and the oil market started to rally towards the end of the day, so we don’t want to see this thing rally dramatically higher from here. That's really why we closed it out early. We just don’t want to see this thing rally and take all of our profits away.

Alright, the last two ones I put in hedge/adjustment, we did get assigned to X which is US Steel. We have the January 44 puts, so those were way above the market, they were deep in the money, and we are long stock at 44 which is a horrible position to be long stock in. But we had continued to roll this position month after month. I think we’ve been rolling it from October just hoping that it would turn around and just US Steel hasn't.

At this point, this is what I’m going to do. I'm going to take this position in the long stock and hold it in my IRA account. I’m going to hold and transfer the shares over, hold that position in my IRA account and continue to sell covered calls against it for the next couple of months. The whole goal here is to at least get back to somewhat of par or even a minimal loss on the trade. But this one hurt.

These two positions in XOP and X made huge moves lower, and there's nothing we can do about that. Those were the three standard deviation moves that stocks make. And you can see this is X, and we’ve continued to roll it and roll it, and just nothing happened. At this point, we’re taking the stock both long and we’re going to hold it because I know that X will continue to rally and rise.

It’s just a matter of time between now and oil. And as implied volatility stays high, this gives us an opportunity to sell premium above the market and just reduce our cost basis, so basically do a covered call on these until we get either a rally in the stock or just premium selling over time adds up to reduce the cost basis in the stock.

The same thing with X. X had pretty big move off of the highs that it had in earnings and you can see it's just a really hard, sharp move down. Really nothing you can do about that other than just at this point, hold the stock if you want to or close out the trade. But honestly, this is why you keep your position size small, to begin with, because of trades like this even though they hurt, no doubt; this is why you don't over-leverage your account 50% or 60% in one trade.

Even though these trades do hurt, they’re not going to kill us, they’re not going to knock us out of commission in the least, and we’re going to hold these until they turn around and we’ll continue to sell premium against them. That's the plan for both X and XOP, the positions that we got. Like I said, I'm transferring these over to my IRA so that they won’t be part of the trading account or the trading alerts anymore.

It’s just going to be a long stock that we’re going to be holding as a long-term investment. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the comment box. And until next time, happy trading!

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.