> I have in the past rolled positions too. The reason I am not doing so here is simply because on a roll you usually give up some premium to accomplish the roll. If I were to simply take the stock, I am immediately writing the same premium next week. Just in a call.
Rolling is a loss aversion strategy for when a naked option has moved against you.
It should be done before the option gets mildly ITM otherwise as the underlying drops, the intrinsic increases (a higher delta loss for you) and the amount of premium that you might get for a roll diminishes. In addition, if you allow assignment, because your underlying is now well ITM, the amount of premium that you get for the covered call could be greatly reduced. You lose either way by waiting too long.
IMO, a good rule is to sell premium to avoid intrinsic value. As long as the underlying hasn't gapped big time, you can often roll to a lower short strike for a later week or so for a credit. It may be a smaller credit than than the initial credit but in return you've gained more margin for error (distance down to the short strike) for a position that went wrong.
Here's an extreme example. Last year I was chatting with someone relatively new to short writing who was convinced that he could roll naked put risk away. He did but only through the good grace of market cooperation. With TSLA in the high $800's, he sold the one week $800 naked put (I don't recall how many). As it dropped through each short strike, he rolled down and out in time for a credit (let's say a strike $50 lower). With only 8 weekly expirations, at some point he had to use monthlies and then, the only way that he could get a credit was to roll out horizontally. So he's taking in 5-10 points of credit while losing 50 points of intrinsic. TSLA bottomed out near $350 and by then, his expiration was 15 months out. Let's say that he was net down $200 at that point. Huge loss but it could have been a lot worse had he not proactively defended. If TSLA had continued dropping, he might have run out of expirations to roll to.
Contrast that to doing nothing and waiting for assignment. In late Feb 2020, TSLA dropped from $800 to $680 in 2 days and pretend that $680 was expiration. What call strike could he then sell for break even?
To put that in today's context, suppose TSLA was $900+ and you sold a you sold a one week $860 put $15. A week later it's $740 (pretend that today is expiration). Where's a covered call's break even? $840 strike next week ($5 premium)? $835 the following week ($10 premium)? $825 the following week ($18 premium)? $795 two months out ($40 premium)?
Nice premium but TSLA is going to drop another 300+ points. Not a good situation to be in.
So AFAIC, rolling down and out stems the losses far better than accepting the losses.
As for this chap, he lucked out as TSLA rallied 300+ points in the next month and he got to break even. After it all, he said that he learned an inexpensive lesson. |
