Many of my coaching clients have strong fear of being exercised early on their short option positions. This fear is based on the horror stories that have resulted from either ignorance or trading short options on margin on speculative stocks.
When I am exercised on my covered call position, I simply receive my full gain early. If I didn’t want to risk selling my stock, I should not have sold the call.
Early exercise on a short put position is rarely the disaster envisioned by some. If I adopt the rule of always selling my puts fully cash secured and also selling against solid blue chip stocks, I have effectively erased the irrational fear of the short put being exercised.
I was short the SPY May(5/14) 422 puts earlier this week and was exercised last evening. I sold the May(5/21) 411 calls against my SPY position today. I began this trade on 4/23 with the Apr(4/30) 416 puts, and subsequently rolled to 416, 418 and then 422. I simply alternate as necessary between covered call and naked put positions. As of today’s close, my covered call position is down 0.5%. If SPY closes above $411 on May 21st, I will be up 0.6%.
Fear of the early exercise of the naked put has been cured.
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