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Handling a losing trade after assignment

It is interesting how things in the stock market can turn on a dime. Yesterday all my stock positions were great, and the sky was at the tip of my fingers, today, everything is the exact opposite.
A few trades which i have opened yesterday and which were doing well are now in the money (ITM).

For example Mosaic (MOS) put selling trade had a nice cushion when I was opening the trade. Seagate (STX) was even better and well above my strike. It almost looked like there is nothing what could stop this trade from being a success.

Today, it is all about a disaster. Seagate sank 18% on the dismal Q3 outlook and it is deep ITM. It will be difficult to handle this trade now.

Although, I will make money on the put I sold against STX, the stock is now almost $600 loss. There is still 38 days to go until expiration and unless I see an early assignment the stock may still recover before then.

I had a similar experience already with stocks like LULU which i sold put against it and the stock went down deep in the money. It is now recovering and it is close to my strike already.

Or TRGP. Another example of a put selling strategy where I sold a put and the stock sank deep ITM. Three days before expiration the stock rallied and I could buy it back almost worthless.

Same was COP trade. I sold the put, it sank deep ITM but six days later the stock rallied again and I could buy the position back at 50% credit.

Or KMI stock. It was too “dancing on the floor” being mostly in the money (not deep in the money) and three days prior to expiration it went up and I could buy it back worthless.

So there is always hope in every trade and no need to panic when things turn around. The important thing is to have a plan and know what to do when certain things happen. This was the lesson I was learning last two years.

 

 · How to handle a losing trade then?

 

If you follow my posts and my blog, you may know that my strategy is to be selling puts as long as you get assigned. Once you get assigned, you keep the stock, collect dividends, and sell covered calls as long as you get assigned.

I sold put against STX with 33 strike and collected 1.47 credit.

My break even price is 31.53 a share.

The stock is selling at 27.67.

If I get assigned at 33 a share. I will realize 1.47 or $147 gain on the put trade, but my stock will see 5.33 or $533 loss (3.86 or $386 net loss).

When selling covered calls, mostly I will not be able to sell a covered call at the same strike as was the assignment (33 strike) as it will probably be worthless already.

I will have to be selling as high strike as possible (for example 28 strike) to collect enough premium but not get assigned and have the stock called away. Hopefully, in this way I will be able to collect enough additional premium to lower the cost basis and end at least break even.

If I get assigned to the call at 28 strike, then I will realize a gain on the call, but close the stock trade at $500 loss (33 put assignment minus 28 call assignment).

Let’s see how this trade develops over time.
 
 





4 responses to “Handling a losing trade after assignment”

  1. easydividend says:

    hey,

    I also sold a put on Seagate. My Strike Price is 32,50.

    My point of break even is 31.62 Dollar a share.

    good to know that I am not the only one who have to handle this trade.

    nevertheless it looks like the stock is going down.

    • Martin says:

      Yes, still in downtrend with no sign of recovery. However, I started selling naked calls and also moved this trade away into December, lowering the strike from 33 to 32, and collected a credit. I will play this as long as the trade will be profitable again and then get out. Once the trade is done, I will post all adjustments I made to manage this trade.

      • easydividend says:

        Rolling forwards looks like a good idea.

        Thanks for sharing

        • Martin says:

          I use all possible strategies to gain time and raise cash to be prepared for the worst, so rolling it in time, lowering the strike if possible, trying to collect more premiums, selling calls against the possition, do whatever it takes to raise cash and lower the cost basis so I can get out of the position without a loss (or if there is a loss, other trades offset it).

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