With XYZ currently at 10, a three month naked put at a $7.50 strike is sold for $1. The trader wants to own the stock at $7.50 anyway, and doesn't want to wait. The stock will be purchased solely for the purpose of writing Covered Calls against it. In our situation 3 days after the trade was placed, the market took a nosedive to 6. This is not a problem, and the trader had this figured into his strategy. However, a little less than 3 months are still left in the $7.50 put before expiration. The trader doesn't want to wait to start selling calls, but whether or not the put will close in the money is up in the air until expiration. So the assignment is up in the air. (I think the proper term is called assignment, it may be exercised) What type of adjustments can be done to maximize time premium during the next two and half months.
Yes, it's 'assignment' What kind of risk to you want to take? As a trader, I do not believe you will do well to use 'maximum time decay' as your underlying objective. If you want positive theta, sell options. But, it's not that simple because selling options involves risk. Mark
At $6, your naked 7.50 naked put should be trading near parity unless it has a high IV. If near parity you can: 1) Hope for early assignment 2) Hope for recovery 3) Start writing your calls now, either naked or as bearish call spreads. The problem with #3 is that if the put is near parity, you'll get bupkus for the 3 month 7-1/2 call so you'll either have to use a lower strike, potentially locking in a loss or go out further in time. Anyway you cut it, you have issues.
Your examples suck, try posting some real numbers instead of stuff pulled from a hat. Looks like those puts you sold for $1.00 are now in the $3.00 range 3 days after you opened the position, and you state " This is not a problem, and the trader had this figured into his strategy". PS .... With a move like that those puts are probably worth more than $3.00. forex-forex ---------- Trading guru
I agree. If your taking the time to help, then I should take the time to proofread. I apoligize. Joshua