So lets say my put was assigned and I own the stock at 100 - premium. The stock at 93. I sell a call at 95 and stock moves past that price and now I'm assigned again. I just booked a loss, didn't I? Or does the strategy assume you only write calls on stock above break even price?
It's possible to make up any kind of numbers that "show" a loss. In reality, at least in my experience so far, assignment is very rare - if you don't want to be assigned, just roll it out for a credit. As it happens, I prefer selling puts to covered calls, so that's mostly what I do. Haven't taken assignment on anything I didn't want even once (amusingly, I've had assignments that I
did want "stolen" out from under me by a last-moment rally.)
But I'm going to run through a scenario - because I 1) want to review what I know, 2) show something more realistic than some made-up random numbers, and 3) show that your options with options (so to speak) are
far richer than anything you've imagined.
(Options are fucking awesome.)
So, let's say we're trading AAPL ($310.40) - I picked it because it's got a relatively high IV right now due to earnings, which makes it look similar to a decent trade when the market vol is up/normal. The monthly that's between 30 and 60 days, 21 Feb, has the 29-delta/295 put going for $6.10; given that vol, let's say I squeeze at least another 0.30 out of it via price discovery. This gives me a break-even of 295-6.40, or 288.60. That's ~22 points before my terminal P&L even
starts going negative.
But assume it does - right away. And I don't care. Why? Because I've looked at the chart for AAPL, and it's had exactly
one drop of 22+ points in the past year - and recovered from that within ~20 days. There are no guarantees in the market, but that's a pretty strong hint.
But let's say it goes down
and stays down. And I don't care. Why? Because AAPL has enough liquidity that there are LOTS of offers on strikes way below mine - and IV is inversely correlated to price, meaning that as price drops, IV rises (and premium along with it.) Unless it drops at least 30 points, I'll be able to roll it out to a further expiration for a nice credit (which will also give it more time to recover.)
But let's say it drops,
and stays down,
and they catch Tim Cook in bed with... OK, let's not go there. But: AAPL drops 30+ points and I don't feel like fighting for it (which I could do, and quite effectively; see the ROKU saga in my journal), so I'm put the shares. And I
still don't care. Why? Because AAPL is going to go out of business some day - but that day has not yet come. And lots of people are absolutely batshit about the company, and other traders know this, and that stock
will come back up at some point. Damn near represents the American economy, all by itself. That's why they say "as American as AAPL pie", right?
So: 310-30=280, and I've paid 295 for it. Boo-hoo, I'm an entire $1500-$640 ($860) down. How, exactly, am I worse off than someone who bought 100 shares at $310.40 (and lost $3040 in that move)?
Meanwhile, let's say that I'm not going to wait for it to recover at all - I'm all wound up about losing that humongous wad of money! - and I sell a 30-delta call on it right away. Given that after an insane down move like that the IV is going to be at or near 100, my handy-dandy BSM calculator tells me that, given a current price of 280, the 45-day 360/30-delta call will go for $15.40. I.e., $1540 in my pocket that day.
So, following your scenario, someone calls it away from me immediately... I do a happy-happy joy-joy dance, pocket my $40, and SELL THE HELL OUT OF SOME PUTS. Because now, AAPL is
really low, the premiums are sky-high, and I expect it to bounce like a jack-in-the-box. That's around $17.50 for a 30-day/30-delta put, by the way.
But let's say no one is stupid enough to do that. And the stock happens to be back to $310 at expiration, which means I get to keep my $1540 - and sell another call. Probably at a much lower IV by then, but $600 for a 30-day/30-delta 325 call (that BSM calculator again) seems reasonable. Now I've got $2140 in pocket
and a strike that's 40 points above my price
and stock that has probably paid dividends by now ($0.77/share, so that's another $77.)
Hmm. That sounds good - which is not good, since we're looking for awful terrible no-good outcomes. Let's keep going.
Let's say AAPL closes
above 360 at expiration, the first time out. And some meanie somewhere
forces me to take $360/share from him and give him my stock... let's see: that's 640-29500+1540+36000, or $8680 in pocket and flat in the ticker.
Dude, this
sucks. Where is my bad outcome?
=========================================================
More realistically (the most common result by far): my naked put hits 25% profit within a day or two of me selling it - i.e., well above the ROI/day for this trade - and I buy it back. That's $160 in 1-2 days. Somewhat less often: it hits 50% profit within a week or two, and I make $320 in 5-10 days.
A lot less often: I hold till right before expiration, and make almost all of it back (I don't like surprise assignments, so I don't hold through expiration.)
So: yes, black swans happen. Yes, you can get whacked to hell by another market crash, or Apple going out of business, or a nuke on NYC. Maybe lose that entire $30K. These are all
outliers, though - way out there - and meanwhile, life goes on, there are bills to pay, and there's money to be made.
But it's not for those who let fear run their decision process. Even options, awesome as they are, can't fix that.
Thankfully we are still in a bull market.
