Yeah exactly, you may get assigned at a $-500 paper loss, but then you turn around and sell a call 1 otm and collect premium, then you get called out at $200 profit, so you have only suffered a $-300 realized loss. Repeat. I was looking rolling protective puts to try to protect the break even, or was planning on just sitting out if I took a large downturn and my break even was not getting any premium on the call side....but the numbers say just ignore the break even.
You're explaining two different strategies. One averages down, meaning you potentially need to allocate much more capital, the other one takes losses on the spot (actually, i'm not sure what strategy that second one is). And How are you having the same amount of contracts in use if one avg down and the other doesnt??
nah,its an illusion..QLAI is right... My buddy does this,and every other month he get mauled on some cheap put he sold,only to sell cheap calls to pick up some pennies in front of the freight train..And of course,he sells calls that locks in losses when the stock rips the other way... You obviously have to roll way out,even though the trade doesnt stand on its own.. WX Achilles heel is he cant stomach taking a loss,and focuse way too much on probability of making money...Doesnt look at expected return/theoretical edge
You completely ignore the break even. Think of it like a dividend stock...you don't cash out just because you lost some capital on a downturn. You continue to take dividends and wait it out. This is exactly the same, I sell 1 otm puts until assigned, and then I sell 1 otm calls until called out. I choose 1 otm just because its an easy benchmark. If I get assigned after a huge kerplunk, I continue on as usual. No rolling out, no put protection, no break evens...just continue plowing on lol. If the underlying continues to drop, my book value is hedged naturally by the ebb and flow of premium coming in, and future assignment (paper) losses + future called away (realized) gains. This will eventually over come any realized losses on the underlying.
And what happens when the stock is down 20 percent?? Which crap call do you sell and how far out?? And what edge do you have ?? Thats the best trade you can find??
Let's say 20% over a week? Ok so if I'm doing it daily 1 otm put, I sell a 199, and price drops to 190. Ok I take a ($10*100) $-1000 paper loss on the assignment. Day 2: Sell an 1 otm call and collect $65 Day 3: Sell an 1 otm call and collect $65 Day 4: Sell an 1 otm call and collect $65 Day 5: Sell an 1 otm call and collect $65 Day 6: Sell an 1 otm call and collect $65 Day 7: Sell an 1 otm call and collect $65 Day 8: Sell an 1 otm call and collect $65 Day8: get called away at a $100 (1otm) profit. Day9: Day 7: Sell an 1 otm put and collect $90 Day10: Day 7: Sell an 1 otm put and collect $90 Day11: Day 7: Sell an 1 otm put and collect $90 Day12: Day 7: Sell an 1 otm put and collect $90 Day12: get assigned at a $-100 (1otm) loss Total paper losses: $-1100 Total collected: $915 Total realized losses: $-85 So even in your worst case scenario I am pulling out of it np. It's basically just a manual version of a dividend position EXCEPT I am gaining the p/l from getting called away at a profit to offset the paper loss when I got assigned. With a dividend you just wait it out, so the recovery would take longer.
You really want to be short 1 deep put vs short 6 OTM calls? And how are you getting the same premium every day?? What strike,ho far out? And you didnt lose 1k..And how do you get called away at 100??
I added more days to my example. I am always selling put/calls with a strike that is 1 OTM so I am always getting 1 OTM premium which is about .65/.90 last I checked. When I get assigned I am taking a paper loss. When I get called out I am realizing that loss. I take the paper loss from assignment, minus premium collected in the mean time, minus the gain for getting called out = total realized losses.