I’m going to talk a little bit about getting assigned.

music selection: “Crimson And Clover” — Joan Jett

On 22JUL15, I sold 94 strike puts on CVX.  It looked like a slam dunk.  There were signs oil was at a bottom.  I picked up 2.82 in premium and that paid 28.82% annualized over 38 days.

But just because you worked in an industry for a decade doesn’t mean you have a crystal ball.  Mr. Market has a mind of his own.  Oil fell quite strongly during those 38 days and we are now looking at CVX at a price of 78.75.  Good!  The important thing to remember when selecting a security to write a put on is that you will be happy to own the underlying at the strike price upon expiry.  Because sure as sunshine, you will eventually be assigned.

I’ll be down 12.43 on each share at assignment.  That is still 2.82 better than if I had just bought the underlying when I wrote the put.  I’ll try to write covered calls at the 94 strike (my entry) while waiting for recovery but the yield will be quite low.  In the meantime, CVX will yield 4.69% dividend yield while I wait.  This is no small part of the reason I am happy to own CVX at my assignment price.

The lesson is to not chase put yield on crappy stocks.  You will regret it.

Devour your prey raptors!

 

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Assignment of CVX

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4 thoughts on “Assignment of CVX

  • August 28, 2015 at 6:23 pm
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    Hi Lizard King!

    I’m in a similar dilemma with Apple and wanted your thoughts. The exercise was at 124P, with the recent sell off, I was only able to get enough premium at the 112C when Apple was less than 100. Looks like today it will be exercised locking in a big fat loss of $12 (124-112)

    Do you always sell where you were exercised?
    In my case today, would it be prudent to get exercised, and buy back in 100 shares when price is <112 and keep selling calls or let it go?

    Appreciate your thoughts

    Reply
    • August 28, 2015 at 7:42 pm
      Permalink

      The key thing is are you happy to own at 124? That doesn’t necessarily mean that you have a gain, but that you like your *long term* prospects at that price. If not, you made a mistake when you wrote the put. Learn from that. Otherwise, you can try to squeak out half a percent a year (a big boost over the existing dividend yield) by writing calls at the original strike or close to it. Or just wait with no options play. Apple is a solid company with a growing yield and a buy back program. It is also cheap on a price to free cash flow basis. That bodes well for future price appreciation. Options sometimes spoil a raptor into expecting every position to pay off in six weeks or less. Early retirement is a marathon rather than a sprint though. You need a good long game too…

      If you aren’t concerned about further downside and want to get out at break even, you can use calls to leverage your upside back out. Buy a slightly out of the money or at the money call, go up a couple strikes and sell two calls to finance the long call (net credit of zero or a few cents on the spread). This is usually done about 4 to 6 months out. You now have two out of the money covered calls and one near the money long call. If you reach the high at expiration, you double your money on the spread of the calls. You need not recover the full price to reach breakeven on composite profit and loss! I tried that with CLNE and it hasn’t worked out so well. That expires in September and I’ll probably try again.

      Reply
  • August 28, 2015 at 8:07 pm
    Permalink

    Thanks Lizard King. I think you’re right, I got too greedy trying to sell 5 DTE calls to bring my break even price down from 124.

    I think the problem is when your price is so far from your put strike ($24 ITM) when I sold the 112C at AAPL =100, that you cannot collect any premium trying to sell at 124. I like the idea of a upside call ratio …will look into that.

    The lesson I suppose is try to sell only on strikes that are near your put? I took exercise just now 5 minutes ago…while happy to own at 121 I will try to get back in at a price less than 112 (my exercise). If it rallies hard next week, I may have missed my boat.

    Reply
    • August 28, 2015 at 8:58 pm
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      I had a finance professor in Grad School who said “Daddy always says, ‘you pays your money; you takes your chances’.” (“Daddy” was also a Ph.D. professor of finance from West Texas.) There is no way to fully eliminate your risk in an options position. The smart thing to do is make your “downside” something you are happy with. Such as owning a great company at a price that was lower than what was available on the day you went shopping. You really can’t complain (ok you can but its just being greedy) about owning Apple at your price. You are down versus anyone who buys today but up against anyone who bought on the day you went shopping. And you have good odds of making a long term profit. Smile a big lizard toothed grin…

      Reply

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