If I sell a put for 5.00 at a $20.00 strike and the underlying is at 15.00... overtime it gets to 20.00 and eventually getting to $25.00 (my pain threshold -5.00) Now I know that an option buyer can exercise whenever they want but that it makes less sense when there's still time left on the option. So if I want to doubleout like this on an option which would seemingly bring it in the money what is the risk of being assigned? Should I be sure to buy it back a week or two beforehand when it's lacking in much time value so I can simply buy back as much intrinsic value as I can and keep the time value? Is the risk of being assigned early more prevalent on a more volatile underlying? Or about the same since a higher vega is already built in.
1) You short-sold a call-option, not a put-option. 2) You could get early-assignment if there is a dividend payment during your holding period. The bigger the dividend, the higher the likelihood of a potential early-assignment. 3) You could get early assignment if there is some type of special dividend, spinoff divestiture or weird company action during your holding period. 4) If you short-sell a $20-strike price, call-option, for $5 when the stock is at $15, you say you'll offset the position if the option premium rallies up to $10. Keep in mind two things. One, your theoretical expiration loss-limit is at $25/share. Second, in reality, because of extrinsic value AND implied volatility increases, you would offset the position at a lower stock price than $25 when the option is likely to trade at $10. Your "buy stop" with respect to the stock price will fluctuate each day. 5) Buy back the option as soon as it declines to $0.50. You've "captured" 90% of the premium at that point. Your risk/reward is no good on the remaining premium.
Yeah you're right about about the option premium doubling happening much longer before I was trying to use it as a theoretical but I guess it doesn't work and I'm not asking the right question at all... so let me put it this way instead... I sell a naked call for $5.00 at a strike of 20.00 with the stock currently at $15.00. BE=Strike+Premium so... 20+5=25 Underlying steadily goes past 20 and is now ITM, but is there ever any danger of assignment if it never goes past the BE? I think that's more the question I had in mind since I've been doing the double out "method" of risk management which obviously can happen quite premature to being anywhere close to the strike much less being in the money. But I suppose it keeps a cap on anything running away. But if I leave a position and chance it it would have to move much more before expiration. I get weirded out that I will be assigned if I even attempt to let it go ITM much less 5 dollars. But I'm guessing my worries are unfounded since as you said the only time it would happen is if there may be a dividend coming up or if there's little time left and it's ITM or if it expires ITM which may be automatically assigned per the rules in which case the safer bet is to go ahead and buy it back and take the majority.
1) Yes, because of those "things" I mentioned previously. Early assignment can occur because the option comes in-the-money beyond the strike price of $20/share. To focus on your BE is improper. 2) Are you undercapitalized? If you get assigned, can you buy the shares? Maybe you'd be better off to trade index options or European-style settled stock options instead. 3) You may want to adjust your exit strategy to offset an option when it gets at-the-money and then short-sell another out-of-the-money call-option instead of this "double premium" thing you're doing.
If it's before expiration, the call can double in value before the underlying (UL) reaches 25. The sooner the rise, the lower the UL price required. Any increase in implied volatility will make that BE price even lower. Apart from the aforementioned dividend situation, if there's time premium remaining it's unlikely that there will be early exercise since it makes more sense for the holder to sell the option to close rather than exercise. However, just because it makes more sense doesn't mean that it can't happen. I once had short MSO calls with something like $1.50 of time premium assigned to me. I immediately covered the short stock and re-sold the calls. A total gift.
You are letting yourself get confused over simple situations. The BE is not relevant. The option owner - the person who has the right to exercise - may care about his BE, but it does not have any influence on the exercise/do not exercise decision. The chances of being assigned prior to expiration are small when you are short a call option (as explained by NAZZ). When expiration arrives, the option will be exercised, and you will be assigned an exercise notice - if the stock is above the strike price. Once again - no one cares about BE prices. Consider this: You bought that option and paid $500. At expiration, the option is only worth $300. Are you going to exercise and take that $300, or are you going to throw it in the trash because it represents a $200 loss? If you throw it away, the loss becomes $500. Mark http://blog.mdwoptions.com
I'm guessing that you're both saying concentrating on BE makes no sense because of all of the other factors priced into the option throughout it's life and you have to manage that risk day to day rather than trying to figure out where the the underlying will expire at.
Not exactly. Prior to expiration, break even is a moving target and where it is at any given time depends on the what the IV is and the amount of time remaining until expiration. Essentailly, break even is right now at 15 because your naked call loses money right away if the UL moves up. As time goes by (assuming no IV change), your break even increases as time premium decays. At expiration, break even will be 25.