Keeping my end of the put-selling deal

This post may also be read at: http://www.cboeoptionshub.com/2015/11/29/keeping-my-end-of-the-put-selling-deal/

Let's follow up on a strategy started on August 25th, which is a day that can be labeled by any one of a number of epithets, as it was the day Mr. Market fell off his barstool.  Actually, August 24th was the day he clawed and struggled all the way down, and the 25th was the day he really went "thud" on the floor.

In this linked post from early October, I detailed some sold puts that got assigned to me; soon after, I disposed of 100 of the 300 resulting shares and kept 200.  The cost basis after accounting for the premium received was $53.61 per share on SVXY purchased at the contracted-for price of $57.50 on the expiration date of August 28th.  The premium I received, as you can deduce from observing the discrepancy between contracted strike and cost basis, served as a down payment on shares, and since SVXY closed that day (the contract expiration date of August 28th) at $52.12 (and traded as high as $53.78 during the day), purchasing SVXY at a cost of $53.61 didn't seem like too bad of an outcome at the time.  In fact, as I boasted within the above-linked post, SVXY was $60.85 at the time the post was written (approximately one month after assignment), which gave me a nice unbooked gain on those shares.  It's written in the post, but you can do the math in your head right now:  $7+ per share gain times 200 shares equals more than $1,400 in profit just sitting there ripe for the picking.  In fact, SVXY tried to touch $65 in October.  Did I take the whopping profit?  At any point when SVXY was in the sixties?

You know I'd be posting some tables and charts here, if I did, but I didn't.  Here's what I did next:  As shown in the next post from mid-October, I continued the same strategy of selling naked puts (actually it was singular - just one put) on SVXY, risking that I'd have additional shares put to me (unless I would trade out of the contract first, and it turns out that I did not trade out of the contract first.)  To be more detailed, though, as described in the post, I liked thinking of it as a short strangle, but really it was a covered call and a naked put.  To be precise, I already had more than enough shares to secure the call, and that changes the character of the call.  The put is then out on its own, not part of a set anymore, but something of a spare part; possibly a little unglamorous and undignified as the descriptor "naked" connotes.  At the end of the post, I noted that I didn't plan to buy back the contracts, and I described briefly the three possible outcomes for that "short strangle sandwich" as I like to think of it.  The strategy I had in mind based on the three possible outcomes is as such:

1. Of course I could have just collected the premium for both the call and the put as an uncomplicated end to the whole story, had SVXY stayed between the two strikes of 60 and 66 through November 20th.  (This did not happen.)

2. I could have just had 100 shares of SVXY put to me (which is what actually happened) along with keeping the premium received from the put, and kept all of the premium from the call with no further obligation on that side (I kept only a very small portion of the premium from the call because I bought it back, when in retrospect, I wish I hadn't.)

 

3. I could have had 100 of my 1,000 (at the time) shares of SVXY called away from me along with keeping the premium from the call, and kept all of the premium from the put with no further obligation on that side (which is not what happened, since SVXY ended lower than the $60 put strike on expiration day.)

One thing I did not want was to have any of my shares called away from me, although of course that is a valid strategy and a possible outcome when selling what really amounted to covered calls.  I wasn't swayed by the idea that I could book a gain (by selecting a parcel of shares that I had bought at a lower price than the call strike and recording that as the one I handed over to the call buyer); I simply wanted to keep my shares.  So on October 23rd, when SVXY topped $64 and VIX wore 13.24 and looked like it might try on 12.00 for size, I got nervous and bought the call back in order to protect what I saw as a precious collection of short-volatility cash-producers.  I wasn't really thinking about how low the VIX was or how fast SVXY climbed compared to recent history and expected trajectory (I noticed it -I'm not unobservant); I wasn't thinking about anything but the way SVXY can march straight up and leave you, crying, behind, and I didn't want to subject myself to that vicious treatment for a lousy couple of hundred dollars as consolation prize.  Then I sat tight even when volatility took a hike back up the mountain and SVXY went on an extended lunch break; I accumulated more shares on November 20th for a total of 1,100 shares of SVXY back from lunch and "at work" (hopefully) now.

As of sometime this afternoon (November 23rd)

So, to compare the scenario from my post of early October with the scenario now, and to mention what happened in between, a summary could be made as follows:  In late August I added to an existing collection of SVXY at a cost basis of $53.61 per share.  I did not liquidate any SVXY shares when prices as high as $64+ were reached 1.5 months later, but I did sell more puts (and an ineffectively traded short call) at that time, and ended up taking assignment of more SVXY at a cost basis of $56.49.  Since the great majority, but not all, of the SVXY shares I hold were bought at prices higher than either of those, I reduced my overall cost basis slightly with the first assignment and then again with the second assignment.  I also have a greater number of shares now, so that any rise in SVXY will power a greater overall profit potential for my account.  Whenever desired, I can to write any number (up to eleven) of calls against my shares without taking on the liability of naked calls.  I may have missed the boat by not cashing in any SVXY shares when $65 was visible on the shoreline, but if I see it again, I'll have a bigger boat this time.

How Cheese is Made (Alternate Title: Put the Short Premium in the Bag)

This post may also be read at http://www.cboeoptionshub.com/2015/11/02/put-the-short-premium-in-the-bag/

The tale of October happens to be the tale of my friend, "Mr. G," and what he did to turn $39,727.47 on September 30th into $56,239.25 on October 31st.  How's that for some trick-or-treat plunder?

Here is the breakdown, separated by types of trades, of which there were only a few.  I'll number the types and show the dates and entry and exit points.

1. The greatest number of trades were made by selling short shares of TVIX on different dates between September 22nd and October 23rd, and buying them back on different dates between October 5th and October 28th. 

Between September 22nd and October 28th, TVIX declined by 47%, from $11.11 to $5.92.  Had Mr. G simply sold short approximately 419 shares, which would be about -$4,653 worth of TVIX on September 22nd and bought those back on October 28th for $2,480, he would have been able to realize the same gain:  $2,173.  Most likely the brokerage is happy with his trading habits.  Instead of making those two transactions, he traded with a frequency comfortable to him,  based on risks he decided to take at the time and with larger and smaller amounts from day to day.  Also, he put more or less into this mostly-ongoing short TVIX position based on availability of funds in his account surrounding other trades which he considered more important at most times.

2. A trade parallel to this one was some UVXY shares sold short and then bought back to close, which was soon replaced by another lucrative trade.

As you can see, on October 5th Mr. G sold 200 shares of UVXY short at around $46.28.  The very next day, he bought those shares back for $42.73 and made a profit of $699.35.  Here's what's interesting:  He closed the short at 10:06AM on October 6th.  Now, according to Mr. G, he must have had four cups of coffee that morning, because during, between, and while taking care of that trade, he went and did the following:

At 9:47 AM, before closing the short shares, he believed that the sharp overnight drop in UVXY would be followed by a bounce (as pictured in the chart, he turned out to be right) so he sold two puts that were deep in the money.  Less than one hour later, when those puts were less deep in the money, he bought them back for a tidy gain of $167.  (See below for details.) In the interim, of course, while watching his under-one-hour-dry-cleaning maneuver otherwise known as taking put buyers to the cleaners, he closed the short shares from the day before and moved on to his next method of turning volality into dollah-tility.

3. (category three of Mr. G's trades which is the above-mentioned limited foray into the short-selling of UVXY puts.  Think about the layers of inversity there for a moment.  Selling puts on a leveraged ETF that purchases futures contracts on the VIX, which... Never mind, shaking head and moving on now.)

4. The largest amount of profit in Mr. G's account during October was made by selling shares of SVXY he bought at various points during September and October.
 

He ran 887 shares of SVXY through the washing machine and found $10,049 in the dryer which represents a gain of 23% (he bought $44,364.30 worth of stock, sold the same stock for $54,413.43.)  That's a lot of extra socks in the dryer that came from who-knows-where.  Actually, it's known where they came from:  The S&P went up by 6% between September 10th and October 23rd, and the VIX decreased by 45% during that same time period, and Mr. G sought to participate in the stability-building in the market by buying SVXY low and selling it high.  In addition to shares, he also dealt in calls as such:

5. Bought the December 45 and 50 strike calls for something in the neighborhood of $8.50 and sold them later for something in the zip code of $11; he had ten honking contracts so this was something under $2,500 in extra wallet-stuffings by the time all was said and done.

6. Sold some calls on SVXY and bought them back for a punishing price soon after, which was the only significant money-loser Mr. G experienced this month.  That's another story for another day which will never come, because the story cannot be told (in this venue.)  Sold some puts on SVXY and bought them back for nearly flat; sold some others and let them expire worthless so that a tidy profit was realized on a two-day trade.

The month ended with only the expiring options to be settled (for full profit to Mr. G and a total loss to the put holder) over the weekend, and a fresh, clean slate of working capital with which to generate more returns in November.  Thanks for following along with "guest blogger by proxy," Mr. G, who gave permission for his adventures and misadventures to be documented for entertainment and maybe even 15 minutes of fame.