Necropost update.
This is how long my ridiculous backlog of books is! I JUST RECENTLY finished the book and you did a good job. It improved my terminology, strategy, and comprehension of gamma in particular. I passed it along to an options-curious friend just as it was passed on to me, and encouraged them to pass it along when done.
I noted the publisher left massive margins on the sides and top/bottom, suggesting the book could have had many fewer pages. Typical Mustachian observation.
I'm a little bit curious about the later sections on strategy, and the advice to never roll down. I get that rolling down is a great way to lock in losses or essentially sell a temporary dip. However, if you never roll down no matter what, it seems like you could lose the ability to earn options income on a stock that stays down.
E.g. XYZ is $100 and your short call is at the 105 strike. Then, XYZ reports an accounting scandal and drops to $75. Next weeks/months 105 calls are going to be hard to sell, but OTOH the additional volatility means you could sell the 90 calls and claw back much of your losses. If you don't perceive the price movement as temporary (e.g. the company has actually screwed up in a way that makes it worth a lot less, or the merger was actually called off, or the medicine failed in clinical trials) then why not accept reality and start digging out?
Of course, you were generally talking about indices, which don't tend to have sudden enduring declines in value like this. Indices seem to always come back, but that's not always the case with companies. So is the never-roll-down advice just for index funds? Would you roll down on an individual stock that had a non-temporary incident, such as the loss of a key contract?
Also, indices can go into multi-year bear markets. If that happens, do you keep selling calls at your original strike prices for pennies or just give up selling calls for a few years until prices recover?
There's an element of this - even with index funds - that seems like we're not accepting reality. And the reality is what the shares are worth at any given time. So anchoring our options strategy on a particular price seems a lot like... well... the anchoring fallacy. But I also understand how a rolling-down strategy if practiced consistently could turn a temporary blip into a sell-near-the-bottom mistake. Perhaps the difference is our judgement of how temporary or permanent the impairment is. If a company just missed earnings or the indices just went down because of a comment somebody important made, then no, we should not roll down. But when an unexpected rate hike changes the valuation of stocks on a DCF basis, that might be a situation where it's more permissible to roll down.
