TLT Short Stock Assignment Case Study – From Loser to $426 Profit

I want to walk through our TLT iron butterfly trade in which we were assigned 200 shares of short stock just days before expiration.
TLT Short Stock Assignment Case Study – From Loser to $426 Profit
Kirk Du Plessis
Oct 6, 2017

As some point or another new option traders worry about their option contracts being assigned. Namely short call options getting short stock assignment. But it's never as bad or horrifying as it may seem.

Key Points from Today's Show:

  • Stock assignment is not a bad thing; it is simply something all traders will go through.
  • Assignment on stock and options is rare and happens less than 1% of the time.
  • Most assignments happen during the week of expiration.
  • It is still possible to trade and manager around assignments.

Trade Progression:

  • Initial trade was made on May 1st, 2017.
  • The trade was a TLT Iron Butterfly, centered at the 121 strikes when TLT was trading at 121.
  • Sold the 121 calls and 121 puts, and bought options out on either end.
  • On the call side, bought options at 128.
  • On the put side, bought options at 114.
  • Net credit taken in was $338 per iron butterfly, of which there was a set of two.
  • Were assigned short stock on the 1st of June, 30 days after initial trade, at the 121 strike.
  • Using technical indicators from our signals research, we realized that ETF was over-bought at time of assignment.
  • Used data to see that the stock may yet turn around and potentially come back down.
  • Four days later, we rolled up our puts that we were not assigned from 121 to 125 - a standard adjustment.
  • Rolling up the puts gave an additional credit of $52, giving a total credit of $390 per Iron Butterfly.
  • This adjustment helped to wide out the breakeven points, from 338 to 390.
  • At June expiration, all of the June contracts for options expired and were out of the money — the 125 puts, 128 calls, and 114 puts.
  • Even when we kept the short stock in TLT, our portfolio was 100% balanced.
  • The fact that we were balanced allowed us to keep the stock because it was helping to balance the portfolio.
  • Going through June expiration, TLT succumbs the technicals and starts turning over, falling down to 122.75.
  • Once the stock moved down, we were able to close the stock and buy it back for 122.77.
  • When we got assigned, the stock was at 124-125 and rallied all the way up to 128 before pulling back.
  • It took time and patience, but it eventually worked out really well.

Calculating Profit:

  • Calculate it on a per contract basis.
  • The original position was two Iron Butterflies, each one being $3.38 credit.
  • Added a credit of $52 when the puts were rolled, so add $0.52.
  • Assigned stock at 121, so add 121 leaving a total credit of 124.90.
  • On June 7th, we bought back stock for 122.77.
  • This gives a per contract profit of $2.13.
  • On each, made $213 and since there were two traded, the total is a $426 profit.
  • Trading options around the stock assignment actually ended up really well.
  • What really helped out was getting the extra credit of rolling up those short puts before June expiration.
  • This helped increase overall premium and helped pad the overall profit.
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