Close Below Put Strike

ZYX is below $50 at expiration

The ZYX 55 call option will expire out-of-the-money and worthless. The investor will be assigned on the ZYX 50 put and is obligated to buy an additional 100 ZYX shares at the put's strike price of $50. The result after expiration: a doubled stock position of long 200 ZYX shares and no option position (they have expired). However, he has received and keeps two option premiums for having sold both a put and a call.

The net cost per share for the additional 100 ZYX purchased from the short put assignment is: $50 put strike - $5.25 combined put/call premium received = $44.75. This meets the investor's original goal of purchasing 100 additional ZYX shares on a pullback at a price less than the written put's $50 strike. The investor is now long the original 100 ZYX shares at $52 and the additional 100 shares at $44.75. The average price for the 200 ZYX shares is therefore approximately $48.38.

If this investor had originally bought 200 ZYX shares at $52, it would have cost him $10,400. Since this investor bought only half of the position at $52 ($5,200 for 100 shares), and the rest on a pullback taking in two option premiums for a cost of $44.75 ($4,475 for 100 shares), he has now spent a total of $9,675 for his desired 200-share position.

Keep in mind that no matter how low the stock has fallen below the put's $50 strike price, the investor has the obligation to purchase an additional 100 ZYX at $50 per share if assigned. The cash for this purchase, however, was deposited in his brokerage account when the covered combination was sold.

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