During the siege of Tenochtitlán, Olid squabbled with Pedro de Alvarado, and refused to assist him in an assault on the causeways leading into the city. This refusal lead to a resounding Spanish defeat, and Olid fled to Coyohuacan. While in Mexico, he married a Tlaxcalan woman.
In 1523, Cortés made Olid the leader of an expedition to conquer Honduras, but while resupplying in Havana, Olid (at a suggestion by Velázquez) declared his independence from Spain and set out to conquer Honduras for himself. Landing at Puerto Caballos, it was not long before all of Honduras was under Olid's control. On May 3, 1524, he founded the settlement of Triunfo de la Cruz. When Cortés learnt of Olid's rebellion, he sent Francisco de Las Casas against Olid with two warships. Despite the fact that both these ships were destroyed in a storm and many of his soldiers defected to Olid, Las Casas defeated Olid in battle and captured him.