Tuesday, 17 February 2015

Early Option Assignment - PG

My current options strategy is to roll in-the-money short puts on their date of expiration to a future duration at the same strike price for a credit. For example, if I were to sell $50 puts and the stock price is below $50 on expiration date, I would buy to close my position and sell to open the same position expiring at a later date.

If I have sufficient margin, this is a low risk strategy.

Recently I had experienced a minor glitch in my seeming flawless system.

I had been rolling five $88 PG (Proctor & Gamble) short puts. Last Friday, I made my first trade in my new brokerage account as I sold five $88 Jan 20 PG puts. When I tried to close my five $88 PG puts expiring January 13 in my other account, I received an error message stating that I did not have sufficient open PG positions to place the trade. Then I noticed I had shares of PG and my account activity showing a PG put assignment.

This is the second occurrence of a short put assignment prior to expiration date. My first experience was last year with 1,000 shares of Crescent Point Energy.

Rather than selling my PG shares, I sold five April $90 calls. Therefore, if PG trades above $90, I will lose my shares or roll my calls. After placing the trade, I saw I had two of my PG short puts remaining. Only three contracts had been assigned, not five. I closed out the two remaining short puts.

End Result:
300 shares of PG
5 Jan $88 short puts
3 April $90 covered calls
2 April $90 short calls

If PG hits $90, I plan to buy to close my two naked calls or buy 200 shares of PG to cover them.

Lesson learned: When selling options, keep in mind the buyer has the right to exercise them anytime

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