OAP 106: TLT Short Stock Assignment Case Study – From Loser To $426 Profit

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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 and in today's latest show I want to walk through our TLT iron butterfly trade in which we ended up getting assigned 200 shares of short stock just days before expiration.

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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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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  • Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
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  • Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
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Option Trader Q&A w/ Mark

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. This week's question comes from Mark who asks:

have been reading through the options manuals and tutorials, and I am really intrigued. I like what it’s about, but it just seems like so much information that is just overwhelming. I just want to be able to start in the right place with the right direction. Simple steps, small steps. Just wondering which direction to go, where to go slowly, where to start slowly, and slowly absorb all of this information the correct way? To enjoy it and really get into it versus feeling discouraged. Any suggestions?

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:

  • EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
  • VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
  • DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we'll discuss why I'm adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
  • 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.