TLT Core Position (IRA)

NaughtyPines Updated   
BATS:TLT   Ishares 20+ Year Treasury Bond ETF
In the absence of some kind of face-ripping rally, I'm going to be assigned shares in TLT here shortly, starting with what began as an October 20th 93 short put and an October 20th 89 short put. Here, I'm using short puts as an acquisitional tool, attempting to acquire shares in multi-year weakness, after which I'll proceed to cover the shares with short calls. The short call premium, along with TLT's monthly dividend, will result in positive cash flow.

There are a couple of different approaches I could utilize here to manage the shares I'm assigned, one of which is to sell a call against each individual lot I'm assigned, laddering out short calls in time as I'm assigned shares. Since I've got quite a few contracts subject to assignment, this would result in sort of a covered call spaghetti-works.

Another simpler approach would be to see what the average cost basis of all the lots I'm assigned is, and then proceed to sell calls at or above that average cost basis in a single expiry. For example, the average cost basis of the two rungs shown here is (89 + 93)/2 or 91/share. With that cost basis in mind, I would proceed to sell two calls at or above the 91 strike at a reasonably delta'd strike in an expiry that's paying. Given the distance price has pulled away from my likely average cost basis, the calls are likely to be somewhat long dated.

Given the fact that my highest short put strike is at 94, I'm more likely to sell calls at 94 initially, wait to be assigned everything that I'm going to get assigned, look at the average cost basis at that point and then adjust the short calls accordingly. Because of its simplicity, this is the approach I'll be going with, looking to stay in the shares and manage the entire position on a fairly long-term basis.

As usual, we'll see how it goes ... .

The other position in which I'm likely to be assigned shares is in XBI. It's got fewer rungs, so walking through the process of assignment, selling call against will be simpler (and therefore probably more instructional) with the October 20th 76 the most likely lot on which I'll be assigned shares (XBI's at 72 and change at the moment).
Randomly assigned early on the October 30th 89 and the October 20th 93. Sold the 94 strike at the shortest duration where that strike is coincident with the 30 delta which is (ugh) way out in September for which I received a 3.07 credit/contract. This results in a cost basis of the average of the strike prices on which I was assigned (89 + 93)/2 or 91 minus the total credits received divided by the total number of lots (6.14)/2 or 3.07. 91 - 3.07 = 87.93.

I'm temporarily using the 94 strike, since that will probably be the highest strike at which I'll be assigned shares. I'll look at my cost basis in the whole position once everything is assigned and evaluate where I want to potentially sell call against.
Trade active:
The "free cash flow" aspect of this position has two parts: (a) the short call premium; and (b) the dividends. The dividends pay out monthly at the beginning of the month; this month, the dividend was .2863/share or $28.63/per contract. For purposes of simplicity, I generally don't count this as a cost basis reduction, but you naturally can do so since you generally want to be able to tell how much you've made on the total position to date.
Well, that's quite the rip off of lows. I always have some passing regret when I roll out the short call far in time to reduce cost basis to keep pace with a declining underlying, only to have it rip up into my short call. (See also, my XBI Covered Call, which I also rolled out far in time, only to have price rip through my short call). The thing is, you never know, so I've gotta be fine with this sort of thing happening from time to time. For the time being, I can just sit back, leave the position alone ... .
Trade active:
Dividends paid: $28.89/lot. $57.78 total. Leaving the short calls alone for now with their 6.50+ of extrinsic to bleed out and since price of the underlying is right at the short call and above my cost basis. Additionally, the short calls that far out in time aren't very liquid ... .
Trade closed manually:
Global Close: Closed for a 88.59/contract credit. .66 ($66) winner per contract.

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