Say stock is $50, you sell the put, get assigned, stock goes to $20.
You can’t sell covered call for $50 strike price, because the bid there is $0 – what do you do?
Will you sell the $30 strike price and risk losing $20?
The Options Oracle Answer:
When doing our due diligence, the first step is to find out what the stock is worth fundamentally, what is the value of the company in ($) dollar amounts. We write puts on under valued companies. Bad press can beat any stock down, but good profit margins mean it will recover eventually. The Options Oracle tries to stay at least 4 steps out of the money, but will go lower if possible.
In the example you listed, we sold the $50 put, and the stock went down to $20, we would hold until the stock bounced back. Only sell a covered call for less than $50, if :
1. The stock could go to zero or never recover (accounting fraud or something like that.) or
2. We could sell a call so far out of the money, that there would be little risk of the call being exercised (very rare for that to happen).
Also remember, we collected premium, so we didn’t pay $50 for the stock, we paid $50 minus premium (say $46). So we would also figure in the covered call premium when deciding on the next step of the trade.
We follow Buffets #1 rule: “First, don’t lose money”.