$541 profit in MDT
Happy weekend!
Today I'm going to share an outcome that hasn't happened in a while: assignment.
When I sell cash-secured puts, my obligation is to buy 100 shares of the stock if it drops below a certain price. When that triggers, it's referred to as assignment.
For new option sellers, this sounds pretty scary, but here are ways to get out of it, as you'll see in the post below.
For reference, this was the oldest trade #163 back in August when I shared the August update but didn't have the time or space to include it. I just wanted to make sure there's a post for this assignment event because it doesn't happen very often.
This week:
$541 profit from an assigned position in Medtronic (MDT)
$541 profit from an assigned position in MDT
Earlier this year I followed the usual trade entry rules and entered a trade in MDT.
I sold the $92.50 cash-secured put for $100.
Usually what you see in these updates is that I then buy back that position for some amount of money and lock in 50%-75% of max profit.
Unfortunately MDT dropped below $92.50 so I had to manage the trade.
The first step to managing any problematic trade is to roll the position. I managed to roll it twice for a total of $319 before getting assigned 100 shares of MDT at $92.50
This isn't great, but the $319 goes directly into lowering my cost basis in MDT, so my real cost is $9,250 - $319 divided by 100 shares = $89.31 per share
While holding the stock, I was also able to sell a few covered calls with realized profits of $150 and collect a dividend of $72, which brought all the incoming cashflow to a total of $541.
This further reduces my cost basis per share to $87.09
This is always the goal of any assignment, to be able to gradually lower my average cost per share so that I'm able to get out of the trade quicker.
As it turns out, I managed to get out of the trade by selling a covered call at $92.50 which ended up getting called away, which means I sold the 100 shares of MDT for $92.50 per share.
Since the shares are assigned and called away at the same price, cancel out each other. So the $541 from selling options & collecting the dividend becomes my realized profit on the trade.
This is basically the “wheel” strategy where one sells cash-secured puts until they're assigned and then sells covered calls until the stock gets called away.
As you can see, it can work out pretty well because your capital is more or less intact, while you make money off the options both on the way in and on the way out.
Can you lose money if the stock continues to drop? Of course. But that's no different than if you bought the stock outright instead of using cash-secured puts to begin with.
You can compare this directly to someone who thought $92.50 was a good entry price only to watch MDT drop as low as $73.75 in June.
They would have no choice but to continue to hold until it hits $92.50, and even then just break even. Whereas I'm out with a profit.
This trade (and all trades in this newsletter) are shared in close-to real time to my private community as updates in my own portfolio (not recommendations). If you're familiar with the basic mechanics of options, you can consider joining the private community to view these updates as well.
And of course the guidance for managing and closing both trades were posted to the community as well.
You can find out more about my private community at the link below.
Have a good weekend!
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This article is for educational purposes only. This is my own portfolio which is being managed according to my goals and risk tolerance. Your situation is likely different and you should do your own due diligence before investing in stocks or options.
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