Dealing with Stock Assignment & Dividends

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In this video tutorial, I want to go through the XLU stock assignment that we had and go through and use this as a case study for why a stock assignment isn’t necessarily a bad thing. I think most traders just naturally freak out when they get assigned stock, but we’ll show you why this assignment didn't hurt us at all even after paying the dividend which is the main reason for the assignment, it still leaves us with an overall profit.

It’s going to be very specific, but I think everyone needs more of these types of video tutorials and case studies which is what we’re trying to do here at Option Alpha just to help you understand the actual process and the numbers behind it because it can get a little bit confusing and we understand that.

As a little bit of a back story, we entered into two short straddles around XLU. That gives us a profit loss diagram that looks something like this. We had a short straddle that we entered into around 44 on XLU, and then we had a short straddle that we entered into around 41.

The combination of that gives us a profit loss diagram that looks very similar to a short strangle with our midpoint being somewhere between 41 and 44. Now, just the other day, back on September 18th, we were assigned 100 shares of stock on XLU following their dividend date in our original short straddle trade on the 41 strikes.

Let me go into my broker platform here, so you can see what we’re looking at. This is a chart here of just the trade tab of XLU. And let me just actually go to the chart here of XLU. You can see the stock is trading right now about 42 1/2. Remember, we sold the 44 straddle which is here and the 41 straddle which is here.

Right now, the stock is trading in between or right in the range that we want, and implied volatility has dropped which helps our position overall. Now, we went through just the other day, last week's expiration, and we got assigned short shares at 41.

Our short call at 41 got assigned, and now we’re short 100 shares of XLU stock at $41. Now, this is where most people start to freak out because they think that they’re going to have this huge, huge loss because of the stock position.

Let me just recap here our overall stock positions down here on the bottom-hand of your screen here. Now, we have the 100 shares that we’re short in XLU. The trade price of those short shares is $41, and the stock is trading right now, live time at about $42.50.

This is working out good because I just did these slides and the stocks moving a little bit. It’s right at $42.51, or now it’s moving to $42.51. Now, we originally sold the 44 straddle for $286. It’s now trading at 186, so I’ve lost about $100.

And our remaining put option that did not obviously get assigned is our 41 strike puts in October we sold for $139 now is worth about $30. Here’s what happened. Let me just actually go to the account page here.

Our two original positions that we had, (this is our trade history and our order history) you can see our two original positions back on 8/25, and on 9/4, we had sold these positions and legged into this trade. We took in credit at $246 and $286 respectively on each of these trades. We took in this massive, massive credit overall on each one of these trades.

And let’s just summarize it here. We sold the 44 straddle and sold later on the 41 straddle, took in a credit of $286 and $246 as I just showed you. That means our initial total credit on the entire trade was $532. Now, this is a reality the key point because this is what everything hinges off of.

And this is why during times of high implied volatility, we want to be option sellers; we take in this massive, massive credit overall. This $532 credit is what we’re going to work with. Now, what happened was is that we got assigned the actual stock.

Now, what we have to factor into first and foremost is the stock assignment and any negative reactions or negative balances from that stock assignment. Since we’re short shares at 41 and the stock is trading basically at 42 1/2, that means that we’re going to lose $1.50 on that side of the trade.

That’s exactly what we’re going to lose. We’re going to lose that $1.50 just because of the stock being short below where the market price is, so about $150. And you can see that’s about where it’s trading right now. This is all live time, so it’s going to change just a little bit as I do this video.

Let’s recap here. We took in an initial credit of $532. We got assigned the stock, and our short stock loss is about $1.50. Now, what’s also key about this is because we were assigned stock around the dividend date, we also do have to pay the actual dividend amount.

Now, that dividend amount for XLU is going to be about $.40. Anybody that’s doing this real needs to factor in the fact that they’re going to have to pay that dividend as part of this position. We got assigned stock; we have to pay the dividends, we have to take out and keep subtracting out that dividend, and we have to buyback if we wanted to close out the entire trade the remaining positions.

What does this mean, buy back the remaining positions? For about $215, that’s what it would cost us right now. And I have this working order here. That’s what it would cost us, $215 to get out of the remaining positions in options.

We’re going to assume if we buy back the stock at about $42.50, we’re going to take that loss of $1.50 on the stock, and then if we wanted to get out of the remaining positions, it would cost us about $215 to get out of the remaining positions, our 44 straddle and the remaining 44 put option that we have that obviously didn’t get assigned.

Now that we have all of this factored in here, our original credit, all of the short stock dividend payments and buyback, and what that leaves us with, if you subtract everything out, is a remaining profit still right now of about $127.

This is why I think it’s really key to go through this and use this as a case study because even after stock assignment and even after having to buyback the shares and pay the dividend and all of this surrounding it, our overall profit is still $127 if we were to close out the position right now. We could do that.

I wanted to do this video and use this as a great case study and example of why the stock assignment is not always necessarily bad. And in fact, it's really important here that you see that the real reason that this worked out in our favor is that we entered it during times of high implied volatility and that drop in implied volatility just let the decay in the options boost the profits.

That’s where we got a lot of the profit that we have remaining right now, is that drop in implied volatility, and that allowed us to go through this assignment process and still maintain the position because we do think that we’ve got a little bit more premium left to capture here as implied volatility continues to drop.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below. And hey, would you do me a favor?

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