Hi Tom, Thanks for the pointer to the older discussion.
However, I do have one problem with they way you posited what might happen. Yes, it is true that the price might drop from $37 to $20, ~46%, but that is a rare occurrence and would not at all likely happen in a 3 or 4 month period that you posited as a problem. I'm sure one can find some cases where this does happen, while not as rare as hen's teeth, it is a tiny percentage of the total market.
The other issue I see is that you posit that your cash reserve is exclusive to that one position which one that does not have to adhere to. It is almost the defining reason to have a single cash vault for all your positions. This accomplishes two things, having more money to deal with unusual occurrences and it also allows one to use a lower percentage cash for each position. Assuming $100,000 total that you are working with, the 20% cash means you have $20,000 potentially gathering dust, especially given the interest rates today. One could reduce this to 15% and still have plenty of money to fulfill your buy requirement for the one position. Assuming that you require a minimum trade of 10% on the buy side, and that you had bought the shares at $25/share, with the 85/15 split (assuming that you had 5 positions at $20,000 each) you would have 680 shares. 10% means buying 68 shares at $20, or $1360, less than 10% of cash reserves, not including what was earned from the premium, which would be almost 1% of your cash reserves. And this is with a minimum share percentage that is double what is typically talked about.
Yes, it is possible that several of your positions could go through the same cycle in step with each other but it's not common on a finer detailed look.
Best,
Allen
