OAP 163: The 5 Month “Grind” Following XLE Short Put Option Assignment

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This was a long trade. Maybe not the longest trade we've been involved in, but certainly one of the top ones as this short put option assignment lasted over 5 months. For most options traders looking to make a quick buck, this trade stretches their patience and conviction far beyond a reasonable level. Still, I think that today's case study is important to hear because it proves critical concepts to how we think about trading here at Option Alpha. And what better way to prove something than to show you how we managed the entire position, start to finish, with real money.

Key Points from Today's Show:

XLE Case Study

  • Original position was entered on 10/11/2018.
  • Entered a very simple iron butterfly with XLE.
  • The day the position was entered, XLE has already fallen from a high of 78 to a low of 72.68.
  • As a result, implied volatility had also spiked to about 100% IV level.
  • Decided to open up a single contract at the time.
  • Sold the 73 calls and 73 puts, buying options out on either end by a couple of dollars. 
  • On the top side, bought the 79 calls and bought the 66 puts on the bottom side.
  • This resulted in an overall net credit of $365.

Early Assignment

  • In this case, we got the "direction" completely wrong.
  • Since our original entry date, XLE has gone down and has not yet recovered to the 73 level.
  • On November 9th, we got early assigned the stock for November expiration. 
  • At this point the stock was at 66, putting that short option position we had very deep in the money, triggering an assignment.
  • We were assigned 100 long shares of stock.
  • At this point, we still have all of the other components of the original iron butterfly position. 
  • Decided to hold the assignment through that period and manage the position. 
  • As we got closer to November expiration, we had the opportunity to sell back our 66 long put option.
  • The 66 long put option started to go into the money and sold it back to the market for $57.

Credit Calculation to date:

Original position - $365

Selling the 66 put option - $57

Total credit = $422

November Expiration

  • XLE is trading at 66, at the short put option strike price.
  • Decided to continue the position and hold onto the long shares. 
  • Everything else we had for the original November position has now expired worthless. 
  • At this point, the stock is trading at 66, so we tried to reduce the cost basis by selling a covered call. 
  • After expiration, sold the December 70 covered call on our position
  • This is selling the next monthly expiration, so about 30 days out from expiration. 
  • Sold the 70 strike call options, which gives a decent premium and also leaves some room for the stock to rebound.
  • Sold the 70 strike call option for 87 cents.

Total credit now = $5.09

XLE Goes Down, Again

  • A week later, XLE moves from a high of 68 closing the day before Christmas at a low of 54.
  • We've now held the stock for 3 and a half months, while it has taken a nose dive twice. 
  • At this point, the stock is really oversold, but our breakeven point has been moved down to $67.91
  • We believed that the market had gone down too far, too fast.
  • On 12/4, decided to roll down our short call options. 
  • Bought back our 70 strike calls and rolled those down to the 68 strike calls. 
  • As the stock was moving lower, got an opportunity to move down our calls and collect additional premium.

Net difference = $51

  • In the middle of December, the stock continues to nose dive and as a result, IV is spiking. 
  • As we approach December expiration, we decide to roll out our covered call position from December to January. 
  • Used a diagonal order to move the covered call from one month to the next month, changing the strikes. 
  • Bought back our December 68 call options and resold the January 67 call options.

Additional net credit = $50

Total credit = $6.10

January Expiration

  • Have held the long stock position for yet another month.
  • The stock rebounded up to a high of around 62 as it reached January expiration. 
  • The 67 call options expire worthless.
  • We are once again left with simple, pure, long stock. 
  • On January 31, decided to sell the March 67 call options for 43 cents.

Additional net credit = $43

Total credit = $6.53

Approaching March Expiration

  • The stock has only gone up about $1.50 during this entire time. 
  • At March expiration, still has not breached the 67 short call strike.
  • Continue to stay the course!
  • Buyback the March 67 call options for 2 cents, and roll out to the 66 call options in April. 
  • At this point, the 66 call option in April was trading at about $104.

Net difference on the roll was $102 credit.

Total credit = $7.55

April Expiration

  • Had an opportunity on 04/05, as the stock moved a little bit higher, to remove the entire position for a net profit.
  • Sold back our entire covered call position in full for a $65.63 credit. 

Total credit: $7.55

Subtract $73 for the assignment. 

Net cost basis of -$65.45

Add back the $65.63 credit

Total profit = $18

  • By no means is this a great profit, but it could have been way worse if we had not decided to keep our position size small, to keep selling premium and extending the duration to reduce our cost basis. 
  • If we had decided to take the lowest possible price, our $66 premium would have turned into a $1,300 loss.


  • You can take a small position and it can become a very large loser.
  • That is why position sizing is so important, to begin with.
  • For many people who got into this trade, the position ballooned so big that it reached their breaking point of no return.
  • If you have enough patience and enough fortitude to stick with it and reduce the cost basis and hold onto the position for potentially 5 months, when it goes against you, you can turn it all the way back around. 
  • The key is to do the mechanics right, sticking to the rules of position sizing, managing your portfolio balance and total capital allocation. 

Option Trader Q&A w/ Robert

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 Robert:

For a small account, would you recommend trading the weekly $1 or $2.50 spread with liquidity in the triple digits on both strikes instead of a $500 spread with good liquidity? What do you think is the line in the sand you shouldn't go passed? Could you run into issues with the triple-digit liquidity if you're just trading a couple of contracts?

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.

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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.