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.