Why I show a loss on some options (multi-legged trade explained)

Let's go back to May and take a look at something, and I will explain what I did.

This started as a simple short strangle; the reason you see two lots of three and one lot of one is because I made a mistake. I didn't realize a trade had partially filled, so I ended up with just one contract. I thought about dumping it right away but decided to just keep it and see if it worked out in my favor. As you can see, it did. But here is why there is a loss on one side of the trade, and why I bought stock, and why it was profitable overall.

Look at the dates. On April 30th, when SVXY was $78, on average, during the day, I wrote puts for the 77 strike for the May 22nd expiration.  I didn't think my order filled, so I cancelled it and moved on, but it turns out that one was filled, and you see it there. I didn't even see it until I had written the three puts (described below.)  The price for this was $3.30.  I kept it in my arsenal of hopeful money-bringer-inners.  Then I:

Wrote three puts at the 77.50 strike for $3.41 each

Wrote three calls at the 85 strike for $1.55 each

Then things got interesting, as SVXY went on a tear, leaving my sweating forehead behind in the dust.  I had a contingency plan, though, since the last thing I would want is to get assigned to make good on calls that were way in the money, if I have no shares to have "called away."  So when it looked like SVXY was not returning to seventies-town anytime soon, I bought 300 shares of it for $84.35, as you see above.  Obviously this was just cents under my call strike of 85.

That same day (May 15th), I cashed in the lone 77 put for a handy $268, as you see above.  I didn't do it because I wanted the money or because I thought 77 was a threat.  I think I needed to make room in my account to buy the shares, and/or I was tired of looking at the lopsided trade - I can't remember what my main motivation was.  But this simplified things.  Now I had a "strangle sandwich," as I call it, or a short strangle with some shares in between the short put strike of 77.50 and the short call strike of 85.


So then it was expiration week, and I think I wanted to do something else with my account and needed to make room, so on May 19th I bought back the 77.50 puts for a gain of $964.

With SVXY climbing every day, and expiration just one day away, I had a [virtually] known and guaranteed outcome for what was now just a set of covered calls.  I bought the shares specifically so they could be called away (at a small profit of $195), and I would keep the premium from the short calls.  The known profit would be proceeds from the liquidation of the shares plus $465 from the short calls at expiration, assuming they would expire worthless to the buyer, for a total of $660.

Then, although I didn't plan to do it this way, and would have done a few hundred dollars'-worth better, had I just stuck to my plan of allowing the shares to be called away, I got greedy and sold the shares one day before expiration for a gain of $1,694.  This left me really sweating it out, because I had gotten on the "greed train" at this point, hoping that I could buy back the calls the next day for less than the price at that moment.  I hoped for SVXY to pull back, in other words, and the time premium to evaporate.  Unfortunately, SVXY traded higher on May 22nd than on May 21st for most of the day, or at least for the parts important to me, because I bought the calls back for $5.83, resulting in a loss to me on the calls of $1,304.  (Instead of the approximate loss of several hundred less I was looking at when I hatched this last-minute daredevil plan.)  Netted together with the shares, the end result of the covered call adventure was a gain of $390, though.

The covered call move would have netted me $660, remember, had I simply let the calls expire and allow the stock to be called away from me.  Lesson learned on last-minute attempts to squeeze a little bit more out of an already-winning strategy.  But it was a winning move, overall, anyway, so I can't complain too much.

So, let's sum up the whole shebang now:
Short "mistake" put at 77 strike: $268 profit
Short 77.50 puts:  $964 profit
Covered calls:  $390 profit
Total for three weeks:  $1,622
(would have been $1,818 at expiration, excluding commission, had the underlying simply remained between the strikes.)
(would have been  $2,013, excluding commission, had I let the puts expire and had I not messed with the covered call near the end.)  I didn't let the puts expire because I needed the capital in order to protect myself by owning shares on the call side.  Maybe I would have been fine by leaving the puts alone and letting the calls do what they wanted, but I didn't know that, and I wasn't going to risk it.

Not bad for something that ran away from me immediately after I initiated it, and now you understand why sometimes you see big-ticket losses in my account.  Maybe they aren't actually losses at all, when you see them within the context of the overall trade of which those "losers" were just one important part.