Question for Ox and others regarding repair of a NP. I am planning to put a large part of my margin into writing puts for developing income. I have calculated and tested way OTM strikes on conservative stocks, and I'm confident in possibilities. However, I haven't fully thought through repair in case of a major correction, and I'd like some ideas. Because I will only be writing way OTM, I will be setting a mental stop of closing the trade if price approaches ITM. However, in recent market volatility price may dip below ATM before expiry, then trend back, even when the strike was initially set way OTM. I hate to pull the plug too soon on an otherwise good company. I hear and read much about possibilities of early assignment. But realistsically, as an individual trading 10-20 contracts, what are the odds of that? I ask, because getting a surprise assignment on a high priced stock is going to throw my margin calculations into disarray, and I want to avoid it. I know, I know...the old rule about not writing on a stock you wouldn't want to own. But the fact is, I don't want to own ANY stock in this particular account, because I will be holding 100% T-bills.
In thinking this through myself, the solution would seem to be to roll out or down at ATM if the reason for the trade is still solid. This would keep me in a credit position, keep me with the company, and avoid any possibility of assignment. Is this a decent approach?
Also, can I assume that open interest in the option may play a role in odds of early assignment? If I am in a thinly traded option, could that increase the odds?
All comments would be much appreciated.
-David |
