Let's detail a story of the last two weeks, in which I stumbled through a maze in search of the reward at the other end.  I've made some wrong turns and backtracked a few times, but I think I smell the cheese ever stronger, ever closer to me, right around the next corner.

On April 28th I started with nothing but an idea, so I set it in motion as such:  With SVXY trading at $56.63 the moment I spied it, I sold ten SVXY 56 strike puts for the May 6th (six trading days away) expiration for $1.70 premium received on each.  All costs or amounts received take into account commission, so if you notice my figures not adding up by eight or fifteen dollars, rest assured I had to pay someone to move all this around for me.  The amount received for this transaction was $1,685.22.

Two minutes later I put through the order I already had worked up:  Ten calls sold at $1.40 each for the same expiration at the 57.50 strike.  The amount received for this transaction was: $1,385.22.

One trading day later, on Monday, May 2nd,  SVXY traded around $52.15 bright and early as the day got underway.  Call premium had really taken a hit, and I could not resist the prices being asked for 57.50 calls.  I decided to close out my short calls by buying them back for $0.19 each.

The closed transaction detail looked like this:

At this point I no longer had a short strangle; I only had short puts.   And expiration day quickly approached.  Over the course of the last five trading days of this contract's life, SVXY slipped below my put strike price of 56 and appeared to want to stay there.  The price to buy back the option was too high for me to stomach, so I planned for the eventuality of being assigned shares over the weekend.  Then, during the last trading minute of the contract's life, I sold to open ten calls to expire the following Friday, at the same strike as the price at which I would be assigned, for $1.50 per contract. My intention was to create, through the call sale and the assignment over the weekend, a set of covered calls.

The plan was a good one, but unfortunately I made what amounted to a bookkeeping error, and I'm still cringing.  I was, of course, assigned 1,000 shares of SVXY at $56 each, since that was the contract I wrote and I had to make good on it.  So on Monday morning (today, May 9th as I write this), I was the owner of those shares plus the short calls (now covered calls) for the 56 strike expiring on Friday, May 13th.

I envisioned my shares being easy-come, easy-go; put to me for $56 via a contract and called away from me for $56 via a contract (assuming share price would dictate that, of course), with premium collected by me on the buying and the selling side; elegant and engineered to be profitable.  Of course, the other possibility would be that I'd just continue to own the shares after expiration,  but either way I'd keep the entire premium received from what was, for one minute, a naked call but became a covered call over the weekend when I was assigned.  The proceeds from the call-writing were $1,485.20.

However, I must not have had enough coffee or something, because I didn't go over the math and I took my broker's bookkeeping on faith without comparing it to my own method.  I'm still not sure what happened; I tried to untangle it but ultimately decided that I'd rather just watch my own math more carefully the next time.  Before stretching this out into details that would give everyone hives, so let's shorten this portion of the story and say that I was under the impression that selling my shares would bring in a profit of high-several hundreds of dollars that I could use to offset (with profit leftover) the subsequent unprofitable closing of the short calls.  Instead of waiting one week for the short calls to expire and the shares to be called away, I set out to book what I thought would be a loss on the calls and a larger profit on the shares (refer back to a brain blip on my part wherein I didn't look closely enough at my cost basis in the shares and the profit/loss on liquidating them.) So I embarked on what I thought would be not a genius move, but a modestly-more-profitable three-part move.

In reality, what happened was that in a double whammy I bought the calls to close and booked a $330 loss, as such:

The big stinger, though, was that the $56,000 (gulp) worth of SVXY that I had blithely unloaded without fully opening my eyes yet that morning was sold at $54.34, and with my buying price of $56.00, that's what I consider a loss of $1,693.17.

To wrap up the mess above, it should be noted for the tally that the first figure mentioned in this post, $1,685.22 brought in for selling short puts, did offset the losses on the liquidation of the assigned shares (described in paragraph directly above) associated with that trade.  If the short puts, the share purchase and sale, and both sets of short calls are all taken together, it looks like I came out $843 ahead from the start on April 28th.

On a different track now but not derailed, I went ahead and completed the next part of my plan, which was to sell SVXY puts now that I was freshly free of any shares and also of any covered or briefly-naked calls.

As of this writing on Monday afternoon, May 9th, I am short ten SVXY puts for the March 13th expiration at the 54 strike, sold at $1.40 per contract, or $1,385.22 received.  I can either buy these puts back before Friday or accept assignment of shares at $54.

No arrow illustrates the fate of the 56 strike puts which expired worthless on May 6th and resulted in assignment to me, but otherwise the option entry and exit points are shown below:

Grapes Fix