Rinse and Repeat

This post may also be read at: http://www.cboeoptionshub.com/2016/05/17/rinse-and-repeat/

At my last writing on Monday, May 9th, my position was ten short SVXY puts for the March 13th expiration at the 54 strike, sold at $1.40 per contract, or $1,385.20 received.  My choices in disposing of the position (or allowing it to be disposed for me) was to either buy these puts back before Friday or allow the contracts to expire and accept assignment of shares at $54, should conditions dictate.

On Tuesday, May 10th at 9:40 AM, I noticed that SVXY opened above $56 and, not knowing what would happen later in the day, I took that early-morning opportunity to be the proverbial early bird, and I bought to close all ten puts for $0.55 per contract (please excuse any rounding of decimals), paying $564.77.  I considered this completed venture to represent a profit of $820 and I was happy with it, but not so happy that I didn't immediately sell more puts.

One minute later I sold ten puts at $1.11 each, also for the May 13th expiration but this time at the 56 strike.  For these I brought in $1,095.23. The scenario was identical:  Either buy back the puts at any time or allow them to expire and accept assignment of shares if contract buyers so desired, depending on share price anytime before, or more likely right at, the contract's end date.  This action on my part was simply a roll to a higher put strike.  (See illustration below for all of these transactions.)

The remainder of Tuesday was uneventful, but the next three weekdays saw my strike price crossed going up or down at least once per day in either direction.  In other words, it was run over and then run over in reverse and then run over again just for good measure.  On Friday, May 13th, SVXY touched a low point of 53.46.  I knew 56-strike put holders must have been whooping it up at the opportunity to sell their shares to me for $56 (their immediate gain / my immediate loss.)  I must have stopped watching it and resigned myself to getting expensive self-bought presents under the tree over the weekend or not; I'd wait and see.

Sure enough, on Saturday, some hardworking people [somewhere, not sure where] made sure that 1,000 shares of SVXY, having just been through the car wash and with the tires shined up to look new, got parked in my driveway while I was sleeping to greet me in the morning.  It turns out that I set about slapping a "for sale" sign on that mess of SVXY without wasting a moment.

My actions on Monday (May 16th) morning are regrettable to me now, but I'll explain them, anyway.  Interestingly, they closely resemble my actions of the previous Monday in which I immediately sold freshly-assigned shares and then wished I had not.  One difference is that this time, I had no associated covered call already in place to go with the shares.  I planned to put one in place first thing Monday morning, though, and I went against my own plan.  It would have been better to do that, so I'm making a mental note to myself to not throw my own strategy out the window so hastily.

What happened (see illustration above)  is that upon seeing a gap up and immediate rise in SVXY right after market open, I decided I'd do anything prudent to get rid of the shares.  I sold them for a price that, when netted against the put sale associated with the assignment, came out to $13 in my pocket.  It wasn't what I had set out to do, and sand was deposited in my swimsuit by the shovelful all day on Monday as SVXY rose, without stopping, to a late-afternoon peak of 57.16 ($2+ over the price at which I had bailed.).  I could have sold my stock for a nice profit of over $1,000 rather than taking a $1,000 loss as I did.  I also could have sold covered calls at the 56 strike (as was my plan, so that my shares would possibly be called away at the same price for which they had been put to me, and I'd bring in the premium, irrespective of the fate of my shares.)

The illustration above shows that the broker tactfully merged the short put and the sale of the resulting shares together instead of showing a gain and a loss. We could pretend nothing happened, but I knew I took my own work apart as soon as I had constructed it.  Moving on...

To get right back in the saddle instead of moping over my mistakes, I set about selling either a strangle or just a fresh set of puts for the May 20th expiration.  All day Monday I played "sub and snub."  That is, I submitted sell orders, and buyers snubbed them.  The standoff ended in a natural manner called End-of-Trading-Day, and I happily sold "better" (lower strike) puts on Tuesday (today, as I write) morning as such:  SVXY 55.50 puts for the May 20th expiration for $1.45 per contract.  Market conditions and sticking to my plan (which can change as market conditions change, but hopefully won't be discarded as quickly this time) will dictate the fate of these puts, and my next post will tell the adventurous or mundane tale.

A Walk Through the Maze

This post may also be read at: http://www.cboeoptionshub.com/2016/05/10/a-walk-through-the-maze/

Let's detail a story of the last two weeks, in which I stumbled through a maze in search of the reward at the other end.  I've made some wrong turns and backtracked a few times, but I think I smell the cheese ever stronger, ever closer to me, right around the next corner.

On April 28th I started with nothing but an idea, so I set it in motion as such:  With SVXY trading at $56.63 the moment I spied it, I sold ten SVXY 56 strike puts for the May 6th (six trading days away) expiration for $1.70 premium received on each.  All costs or amounts received take into account commission, so if you notice my figures not adding up by eight or fifteen dollars, rest assured I had to pay someone to move all this around for me.  The amount received for this transaction was $1,685.22.

Two minutes later I put through the order I already had worked up:  Ten calls sold at $1.40 each for the same expiration at the 57.50 strike.  The amount received for this transaction was: $1,385.22.

One trading day later, on Monday, May 2nd,  SVXY traded around $52.15 bright and early as the day got underway.  Call premium had really taken a hit, and I could not resist the prices being asked for 57.50 calls.  I decided to close out my short calls by buying them back for $0.19 each.

The closed transaction detail looked like this:

At this point I no longer had a short strangle; I only had short puts.   And expiration day quickly approached.  Over the course of the last five trading days of this contract's life, SVXY slipped below my put strike price of 56 and appeared to want to stay there.  The price to buy back the option was too high for me to stomach, so I planned for the eventuality of being assigned shares over the weekend.  Then, during the last trading minute of the contract's life, I sold to open ten calls to expire the following Friday, at the same strike as the price at which I would be assigned, for $1.50 per contract. My intention was to create, through the call sale and the assignment over the weekend, a set of covered calls.

The plan was a good one, but unfortunately I made what amounted to a bookkeeping error, and I'm still cringing.  I was, of course, assigned 1,000 shares of SVXY at $56 each, since that was the contract I wrote and I had to make good on it.  So on Monday morning (today, May 9th as I write this), I was the owner of those shares plus the short calls (now covered calls) for the 56 strike expiring on Friday, May 13th.

I envisioned my shares being easy-come, easy-go; put to me for $56 via a contract and called away from me for $56 via a contract (assuming share price would dictate that, of course), with premium collected by me on the buying and the selling side; elegant and engineered to be profitable.  Of course, the other possibility would be that I'd just continue to own the shares after expiration,  but either way I'd keep the entire premium received from what was, for one minute, a naked call but became a covered call over the weekend when I was assigned.  The proceeds from the call-writing were $1,485.20.


However, I must not have had enough coffee or something, because I didn't go over the math and I took my broker's bookkeeping on faith without comparing it to my own method.  I'm still not sure what happened; I tried to untangle it but ultimately decided that I'd rather just watch my own math more carefully the next time.  Before stretching this out into details that would give everyone hives, so let's shorten this portion of the story and say that I was under the impression that selling my shares would bring in a profit of high-several hundreds of dollars that I could use to offset (with profit leftover) the subsequent unprofitable closing of the short calls.  Instead of waiting one week for the short calls to expire and the shares to be called away, I set out to book what I thought would be a loss on the calls and a larger profit on the shares (refer back to a brain blip on my part wherein I didn't look closely enough at my cost basis in the shares and the profit/loss on liquidating them.) So I embarked on what I thought would be not a genius move, but a modestly-more-profitable three-part move.

In reality, what happened was that in a double whammy I bought the calls to close and booked a $330 loss, as such:

The big stinger, though, was that the $56,000 (gulp) worth of SVXY that I had blithely unloaded without fully opening my eyes yet that morning was sold at $54.34, and with my buying price of $56.00, that's what I consider a loss of $1,693.17.

To wrap up the mess above, it should be noted for the tally that the first figure mentioned in this post, $1,685.22 brought in for selling short puts, did offset the losses on the liquidation of the assigned shares (described in paragraph directly above) associated with that trade.  If the short puts, the share purchase and sale, and both sets of short calls are all taken together, it looks like I came out $843 ahead from the start on April 28th. 

On a different track now but not derailed, I went ahead and completed the next part of my plan, which was to sell SVXY puts now that I was freshly free of any shares and also of any covered or briefly-naked calls.

As of this writing on Monday afternoon, May 9th, I am short ten SVXY puts for the March 13th expiration at the 54 strike, sold at $1.40 per contract, or $1,385.22 received.  I can either buy these puts back before Friday or accept assignment of shares at $54.

No arrow illustrates the fate of the 56 strike puts which expired worthless on May 6th and resulted in assignment to me, but otherwise the option entry and exit points are shown below: