I write covered calls on SPY. When the ETF drops in price, I would never
write a covered call at strike price and expiration date, where if
would lose money.
Recently I woke up in the middle of the night
(that was a
mistake) and thought what would happen if I did. What
would happen if I accepted the
unrealized loss and just wrote at the new price like it was the first,
would give me the best premium. What if
I thought of the ETF holding as shares that generate premium, rather
Ultimately the ETF goes back up or I die, and then my
has the unrealized loss, but at that point I’m not worrying about it.
I must be wrong some where here, what
am I missing?
Good question. This is a common situation that must be faced by writers of covered calls. But, it's similar to investors who buy something and watch it decline in price.
For many, taking a loss is just impossible. Over the years, they wind up with a portfolio of garbage – all those losers they are still holding.
'Traders' as opposed to investors are less likely to be in that situation because they understand that when the investment doesn't move as anticipated, the investment decision was wrong and it's time to exit and move on.
ADDENDUM: The difficult for most to recognize is that you have already lost the money. Refusing to write covered calls until you can sell calls at the original strike price is a strategy based on hope. To me you must decide:
Do I write calls now – and generate premium as income – or do I become a investor and hold the stock, doing nothing unless it rallies? For my comfort zone, this is an easy choice. I write the calls, hoping to reduce my loss. My goal is to make money from today forward – I do not worry about realizing a loss – because the money has already been lost.