OAP 142: EWZ Short Put Option Assignment Case Study

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Many new options traders worry about what might happen to their portfolio during a short put option assignment scenario. They wonder how they can recover or if they have enough capital to hold onto the stock position. Just a few weeks ago we were assigned on one of our short put options in EWZ and were forced to buy stock well above where the stock price was trading at the time. In today's podcast I want to walk through the entire trade, including the short put option assignment, and help you understand how being assigned options impacts your account and how you can still trade around these events by using a couple key strategies.

Key Points from Today's Show:

  • Often times trades take a lot of time and patience to play out.
  • However, having the ability to stick with a position and not give in to the fear to sell is a challenge for many traders.

Case Study: EWZ Short Put Option Assignment.

  • IV spiked as EWZ was falling
  • Had to keep adjusting position as the stock kept falling.

First position:

  • May 21, 2018 - sold the 38-centered iron butterfly in EWZ for a $323 credit.
  • Sold the 38 calls and 38 puts and bought options out at either end, with a set of just two contracts.

Second position: 

  • May 29, 2018 - sold the 36-centered iron butterfly in EWZ for a $310 credit.
  • As EWZ continued to move lower, strategy was to ladder into positions, spreading the trade entry out over time.

Third position:

  • June 13, 2018 - sold the 34-centered iron butterfly in EWZ for $264 credit.
  • Moved our entry down as the stock continued to move down.

Assignment:

  • June 28, 2108, get an assignment of the original 38 short put options.
  • Now we are long 200 shares of EWZ at a strike price of $38 per share. 
  • At this point, a lot of traders gave up and closed out the position
  • Deep in the money short puts behave very similar to long stocks, so the impact is not huge. 
  • The fact that we got assigned stock really does not change how the position was acting.
  • Decided to hold the stock, given that the technicals suggest EWZ is over-sold.
  • Also held the remaining contracts that we were not assigned.

Thought Process:

1. Look at the technicals.

2. Are you assigned long stock at the bottom of a big move lower?

3. If yes, are the technicals suggesting that maybe it's over-sold?

Facts:

  • Had a laddered position that was not too bad
  • Took in a lot of credits - $323, $310, and $264.
  • EWZ was at the bottom of a 4.5 month move lower. 
  • Technical signals suggested EWZ was over-sold.
  • Were assigned really early in the expiration cycle. 

After assignment:

  • July 6, 2018 - EWZ starts rallying, slowly back up near 34.
  • We were able to close the third position for a profit. 
  • Bought back the 34-centered iron butterfly for $196 after we sold it for $264.
  • July 13, 2018 - EWZ has rallied all the way back to 35.
  • Now able to close 36-centered iron butterfly for a $225 debit.
  • Sold it for $310, bought it back for $225. 

Calculating Breakeven Point:

  • Take $323 credit and subtract the price of the stock that you were assigned, which is 38. 
  • The price we needed to see EWZ rise above was at least $34.77. 
  • A couple days later, sold back shares that were assigned on July 20, when the stock price reached $35.52
  • Sold back original shares that we were assigned at the bottom of the move in EWZ - sold for $35.52.
  • Turned final butterfly position into a winner.

Conclusion:

  • In this instance, EWZ never really gave us a great opportunity from the start. 
  • Be mechanical in spreading out your trades.
  • Trust the use of technicals. 
  • Keep position size small
  • Be patient enough to understand that things never go straight up and straight down.
  • Link to Nightly Video Update recap version.

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Free Options Trading Courses:

  • Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
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Option Trader Q&A w/ Joseph

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 Joseph, who asks:

In a recent episode, you spoke about one of the clients you coach that had a 7-figure account and how she was able to some pretty extraordinary amount of income per year.  I found it really interesting to hear. Could you share some stories about clients or friends that have large accounts and what they are able to achieve? I'm sure each person has their own strategy and goals in life, but I thought these stories could be quite inspirational for those of us who have smaller accounts and dream of someday achieving our life goals of a larger account.

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

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.
  • Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 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:

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  • 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. 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 two daughters.