4 Month Case Study In GLD Stock Assignment & Covered Call Trading


Hey everyone. This is Kirk here again from Option Alpha
and welcome back to the video review where we’re going to go over all the trades that
we made on Friday, October 19th, as well as the recap of other trades that we closed,
again, on Thursday the 18th. Just as a reminder for those of you who are
elite members, we do not have a strategy call this weekend because I’ll be traveling today
or on Sunday, I’ll be traveling and so, we do not have a strategy call for this Sunday. We’ll just recap everything next Sunday
moving forward. The first one I want to go through today is
actually our GLD position. I want to go through this covered call assignment
because I think it’s a really good little mini case study in how we managed this position
and basically turned this thing around from a full loser into a small winner. At the end of the day after all adjustments,
all credits, debits, etcetera, we ended up with a total overall profit of just $16 which
is not much to write home about, but again, we were able to convert and turn this thing
around from a big loser into a small winner which was good. And I think the logic of how we did this and
kind of the mechanics… Again, all stuff that we teach here at Option
Alpha is all inside of our courses, but to actually see it happen in real-time and kind
of walk through the process over the last couple of months I think has been very eye-opening
for a lot of people. I know I’ve got a lot of emails from members
saying that this was a position that really had a light bulb moment for them, so I want
to kind of cover it in detail. This a chart here of GLD. Our first initial position in GLD at least
for the ones that we’re talking about here was the 121 iron butterfly. Now, we got back into this thing on 6/20 something
which was all the way back here and we centered this iron butterfly at 121, so you can see
where the price was at the time and literally, this thing has not gone our direction pretty
much the entire time. From the time that we entered the position,
we got the direction absolutely wrong and not that we were trying to pick direction
because we’re not, but we didn’t really get any favors I guess from the market and
the direction and gold continued to fall down and basically went all the way down to around
about $111, so about $10 off of where our initial price point was. But during this time period, we stuck with
the position, again, tried to use options to our advantage in the sense that we’re
using covered calls to reduce cost basis, we’re rolling to increase our time and duration
and trying to get some sort of cyclicality back in the market. Now, at the time that we actually saw the
position go all the way down here to 111 and we had told members when we got assigned down
in this range here that at that point, we had seen that the technicals were suggesting
that GLD could rally, that the technicals from our Signals research were showing a buy
signal on GLD and this was pretty clear to me because we’ve had such a huge move and
it was starting to go parabolic to the downside. It’s only a matter of time before a little
bit of market cyclicality comes back into play. And so, it was hard to hold through this for
sure because of course, we get all the nasty grams and all the nasty emails from people
saying that they’re dumping the position, they’re done, they’re out, totally removed
from options trading now because of this and just because they don’t have enough patience
to let the cyclicality come back into play. But we’ve seen this, I mean, dozens and
dozens of times now. This is not the first time that this has happened. It happens all the time in different securities,
in different directions. It’s literally something that continues
to happen repetitively. You just have to be patient enough to let
all the probabilities play out. Here’s a look going back 150 days on our brokerage
statement just again, searching for GLD because this is basically how far back we had to go
to capture the initial trade. Here’s our initial trade. Our initial iron butterfly was the 121 iron
butterfly and we were again, selling this on 6/22 right where I showed you earlier,
totally bad time to sell this in the sense that the market did not do us any favors and
moved completely lower. Well, we held firm through this position all
the way until we got to early August. So, in early August when the market was heading
lower… And again, this was early August here, 7th,
8th, somewhere in here where the market was heading lower, we then got assigned on GLD. And so, we got assigned long stock at 121
and that again, was not doing us any favors because we were deep in the money, so the
position was already acting like stock, but we actually got assigned the 200 shares of
long stocks, so we had to hold it and at that time, what we decided to do was first, to
roll down our calls on the call side closer to where the stock was trading in at the time. We rolled down our 121s to 115, a very simple
mechanical roll, rolling the unchallenged side of the position lower and so, we took
in an additional credit of $.65 on that roll. Again, initial $3.13 credit, we add the $.65
credit to that because we’re adding a credit and again, moving the position a little bit
more favorably towards the direction of where the stock is going. Now, at that time, GLD continued to go down
and basically what happened is we let the rest of the positions in the August contracts
expire and we closed the position for the one contract that was actually in the money
at this point which was our 114 put option. If you go back here, you can see the 114 put
option we had bought all the way down here. This is at the bottom of the screen right
here. We had bought the 114 put option for $.18
as protection. At the time that we got to August expiration,
everything else expired worthless, but the 114 put option was now deep in the money because
the stock was down around like 111. This was August 16th where the stock was actually
moving lower. Practically this low day here, the stock was
now a couple of dollars in the money right before August expiration, so although we were
holding long stock and we knew we were going to hold long stock, we will also could take
advantage of the protection that we had bought and that paid a little bit of money, so we
were able to sell back the 114 put options and collect a $248 credit, so that, again,
adds to the total credit that we have on everything. We started adding up the 313, we started adding
up the 65 here, the 248 that we got in credit for that long protection that actually paid
off and so, now, we’re starting to build a very significant credit and cost basis reduction
on the long shares. Now, at the same time, we came in just a couple
days later and we continued to sell covered calls against this GLD position. In the September expiration month, we again,
sold the 115 covered calls. The August 115 covered calls that we had that
we had rolled down here, those expired worthless and out of the money, so we collected that
full premium. We went back in and sold the 115 covered calls
on September for $.73 and as GLD was continuing to find a bottom here and our Signals actually
prove to be correct in the sense that GLD stopped moving lower, started trading sideways
to potentially a little bit higher here, that 115 covered call which was right above this
level here paid really, really well for the entire month. In fact, we just had to hold through a lot
of sideways action pretty much all the way through September, but that covered call actually
did really well for us. Later on, we rolled that covered call to October,
so now, this is again, the third month that we’re now continuing this position, still
holding long stock, the stock is not really moving anywhere, GLD has kind of found a bottom
here, but it’s taking a little bit of time and we’re just continuing to reduce cost
basis by selling these covered calls. Again, we had sold the 115 covered call here
for $.73, the 115, we bought back for $.7 right there (I just crossed it out, but it’s
right here, $.7) and then we sold the October 115, so the same strike price, just a new
month, just continuing this repetitive process for $.72, so net credit that we collected,
again, of $.65 adds to our total credits that we’ve collected so far and reduces the cost
basis on these long stock contracts that we were assigned. So, then we continued going through September. We get all the way to October now, so now,
we’re into October here. You can see 10/8 and now, we roll down our
115 calls to 113. What happened here is on October 8th, we saw
that the 115 calls were not really worth any money and this was right around here when
GLD actually had popped lower. We saw that the 115s were not worth a lot
of money, so we rolled it closer to collect a little bit more premium in October, did
not know that GLD obviously was going to rally back through that price point, but our logic
at the time was that if we rolled closer to the 113 strikes, we could again, collect an
additional credit which was $.45, so we again, collected some additional credit here and
the total credits would then add up to a breakpoint around 113, so that was good for us because
if the stock had even just a slight rally… And we talked about this when we rolled these
calls down back on that day. If the stock had a slight rally, we’d be
able to take this thing off for a profit. And so, it’d be a small profit, but we would’ve
whittled away the potential loss on this position versus doing nothing. Now, fast forward to today and we did see
the stock finally actually make a nice move higher back above our 114, 115, 113 range
that we were looking for. GLD finally had some cyclicality come back
into play and this could be the end of it. I mean, it could be just a small pop and then
it continues to move lower, but that’s all we needed. We just need a little bit of a move higher,
a little bit of time decay coming out of these positions and again, what we were able to
do now is buy back and close the entire covered call position. We sold back the stock at 115.96, had to buy
back the call option for a much higher price than initially, but again, that all factored
out to exactly a price point around 113 which is where the covered call position was. We basically just liquidated the covered call
position at the strike price of the short contract. Now, you add up all of the credits and you
take out the debit of buying stock at 121 and you’re left with an $.8 profit per contract
or per 100 shares and so, that’s where we have the $16 profit overall, is because we
had two of those contracts. This is a really interesting case study. You just take your time and kind of go through
this and walk through what we did, everything that we’re doing here and everything we’ve
done on all these positions is very much the same mechanics just played out in different
ticker symbols. We let the cyclicality come to us. We don’t take the bait of falling knives or
shooting star rocket ship stocks. Whenever we get these technical signals that
the stock is going to roll over or going to stop its momentum, we know that even though
it’s going to move potentially sideways… And GLD did not by any stretch make this huge
rebound that many people might think that it would do with a technical buy signal. When you have technical buy or sell signals
using these indicators, it’s not that the stock is going to make this huge V-shaped
movement. It’s more likely what we’ve seen that the
stock is going to stop falling and move sideways, but that sideways action here is great for
an option seller because during that time period, we can sell covered calls or covered
puts, whatever side of the trade you’re on and reduce cost basis on these shares and
that’s all we did, folks. It’s literally all we did this entire time. We had the 115s here, then we had the 115s
here, then we had the 115s here, then we had the 113s. We just kept selling covered calls on this,
kept moving our strikes and reducing cost basis to the point at which it moved down
the breakeven point so far that we were able to take out the position for a win. Again, to me, this is a really great case
study in just being patient as a trader, letting the market come to us, having the capital
available. I mean, this hits on so many different topics,
but you got to have the capital available to do this. This is why I tell people to leave money in
your account, leave room in your brokerage account to have a position like this that
you might have to hold because if you leave room to hold a position like this for four
months when you… It’s not the ideal situation, but it’s
what we had to do. That could turn a position from a multi-hundred
dollar loser into a small winner and that helps overall. This position had we exited it when we got
assigned and at the bottom here, we would’ve lost I think $1,100 on this position. It would’ve been a real big loser for sure. But if we just are patient, have a little
bit of faith in the system, the process, the mechanics that we teach here, things generally
come back around and that’s what we saw here, so it’s a really, really good position for
us and again, nice position to cover. Just to cover the other positions that we
had on October 18th… Again, just when we have closing trades like
this, we will cover them in the other videos. If we don’t have any opening trades, we’ll
go back and do them. TLT, this one is an example of one that did
not work. Now, in this case with TLT, we do have two
positions or had three iron butterfly positions in TLT. TLT went down so far so fast that we had no
opportunity to roll or extend this trade. Now, unlike what happened in GLD and some
of the other ones that we’ve had, if we have an opportunity to roll for a credit and
extend the trade, we’ll do it. In the case of TLT, these 121 put options
that we had which were centered much higher than where the market is (again, these were
all the way up here) never had an opportunity to be rolled for a credit. In that case, we don’t want to dig ourselves
deeper into a hole. We can’t roll for a debit. We’re actually paying money to extend the
trade, forcing ourselves to potentially lose even more money on this position and that’s
not what we want to do. Now, this was the only one that we did not
have an opportunity to roll. The other positions, including a long stock
that we’re still holding in TLT, we’re still going to maintain and still sell covered
calls on. TLT to me is what GLD was two months ago. We got assigned on TLT. We’re holding long stock in TLT. We think that the market cyclicality is going
to see a little bit of a rebound here in TLT. At least that’s what the technicals were suggesting
as well which is good for us. And so, if that’s the case, then we could
make back some of the money on the long stock that we’re holding and the covered call
positions that we’re selling on that. OIH, we did end up closing out for a small
profit. This was a position that we had rolled, again,
multiple times. The OIH position we had in October, we rolled
it to November, again, just to give ourselves a little bit of extra duration. That ended up working out pretty well because
OIH finally rolled over here and moved back down around the 23 strike. Again, this is just another great example
of why we do what we do as far as rolling positions. Here’s OIH. The original position here was back in September,
early September, the 23 straddle. Again, you look at the chart here back in
early September, this is here. We basically got into this almost the worst
possible time because the stock made a huge move against us, but then we rolled the contracts
out to November to give ourselves more time when implied volatility spiked in OIH and
that gave us enough time and enough additional credit. And this was the roll here, so we rolled out
for a $.53 credit, massive credit to be able to roll this thing out. We rolled it out for a $.53 credit and that
gave us enough premium (when you add up 53 and 169) to be able to close the position
today and take profits off the table. Now, in this case, because we adjusted it,
we just wanted to remove the position, take the win because we were deep as a loser, paper
loss on this thing early on. And so, now that we’ve regained that by rolling
and extending our duration just a little bit, that really, really helped out. This is a great example, again, of just a
lot of cyclicality in the market. We always think that one move is the end-all
be-all move, but look how quickly this thing totally reversed, almost a month and a half
of gains. I mean, eight days and it’s absolutely crushed
and reversed the entire month of gains. Alright, so other positions that we got out
of, we got out of one of our sets of 39 straddles in EWZ. This was a good position for us as well. We’ve got a number of laddered straddles
in EWZ because implied volatility is high. But as EWZ went higher and implied volatility
spiked, we sold some straddles at 39. We did not hold these things too long at all. In fact, I think in this case, it was less
than 20 days or something that we held these straddles. Yeah, so we had these on 10/8 is when we sold
these, so about 11 days. We bought these back for 334 today, so that
was a nice profit. We sold them for 448 10 days ago or 11 days
ago on 10/8 which was right here, this top day right here when everyone was not selling
these and just being shy and moving away from positions. But again, during these high implied volatility
times, this is when you’ve got to be a little bit more aggressive towards positions because
we see them come in faster, we see bigger premiums, bigger potential profits on just
a small number of contracts, so we took $334 of profit off the table for EWZ. Alright, so new positions today, we got into
a new position in GDX. This was another laddered entry in GDX. Gold generally has been a good vehicle for
us to trade, so GLD turned out to be okay. GDX has actually been a pretty good position. Implied volatility has recently been high
the last couple of months in GDX which is really why we want to trade it. We already have a position in GDX for November. This was a very tight strangle that we originally
entered into right here which was the 18, 19 contracts. We’re adding the 20 straddles right here
just to give us some additional premium and kind of balance out the position a little
bit more. Here’s the position in GDX right now blended
for November. Our breakeven point is out here around 20.60
or so. GDX still has some potential to move higher
and still make some money which is good for us and implied volatility is falling. The next position that we got into or the
last one is finally, an FXE position. We’ve honestly been trying to get into this
for the last week or so, trying to balance out our position for November expiration. FXE has been generally moving lower. We have one iron butterfly already in place
for FXE, but we wanted to get another iron butterfly just to again, balance out the position
a little bit more and kind of blend the strikes lower. You can see, our initial position up here
was around 113. We had sold the 113 a while back. Now, we’re adding the 110. That gives us a blended payoff diagram that
looks more like an iron condor, but again, it just moves those breakeven points down
to the left a little bit more. In fact, our blended breakeven point now is
around like 109.50 or so. FXE could potentially move a little bit lower
and we’d still make some money at expiration. I still like this position a lot. I like having exposure to the euro. This helps diversify out our portfolio a little
bit, so for us, it was a good trade because it balanced us and gave us a little bit more
diversity. Next week, I think the focus is going to be
on starting to build out the December portfolio as we get closer. November looks to be pretty much full unless
we have any other adjustments which we’ll get into maybe in the next two weeks or so
if we need to, but now, we’re going to start focusing next week on building out December,
start trading some high implied volatility tickers first and start slowly building out
that portfolio, so look for us to be making more trades in that department next week. As always, hopefully you guys enjoy these. If you have questions, let me know and until
next time, happy trading.

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