Covered Calls and Cash Secured Puts (Part 29)

Quick review: why bother calculating the annualized return of a RO & Up adjustment? Ideally, I want to raise cash with every trade. The initial trade should start with the potential to make at least 15% annualized. If each subsequent trade also makes at least 15% annualized then I will have an overall profit exceeding 15% annualized when the position closes.

Last time, the oft-mentioned theme of mirror image thinking got me out of a logical conundrum. I can, therefore, factor in the decrease of extrinsic value on a RO & Up when calculating the adjustment’s annualized return. What about with CSPs?

When a short put goes ITM, the profit is capped at expiration. Rolling down and out to lower the strike price therefore releases funds and makes them available. I should therefore be able to factor in the decrease of extrinsic value on this put adjustment when calculating the annualized return of the adjustment.

Issue resolved.

Evaluating whether to roll a short call down for a CC position or to roll a short put up for a CSP position is slightly different because the expiration month does not change. In this case I must calculate the annualized return for the whole position assuming it goes back to cash (i.e. call assigned or put expires) at expiration.

If rolling in the same month poses risk of being assigned at a disadvantageous strike price then my head needs to be on a swivel watching out for sharp changes in stock price and ongoing availability of replacement options for escape. If assignment at the adjusted strike price still results in a profitable position then it’s a choice with which I can feel comfortable.

In the next post, I will introduce the management technique of dollar cost averaging.