I have a few simple rules for my put writing, and they have served me well as long as I have had the guts to stick to them:
1a. I only write puts on a stock I wouldn't mind holding onto for a long time (i.e. I think they are currently undervalued). I'm essentially dollar cost averaging my buys this way. I won't sell the shares immediately when I get assigned since I like the future prospects.
OR
1b. If I am uncertain of the stock's future, or I am unwilling to take some risk on the stock, when I get assigned shares from a put write, I will immediately sell the stock, regardless of the loss. This is very hard to do and takes discipline, but it is the safest route.
2a. keep the put writing proceeds as cash if I feel the stock has very little chance of making a big run up in the short term
OR
2b. buy risky call options for that month (or a few months out) with the proceeds if I feel a run-up is coming
In a down year, you WILL lose money with this strategy, but if you keep at it consistently, you will make good money long term. Last year was the first year I had a capital loss in 8 years of using this strategy, and it was pretty small. Part of the reason it was only a small loss is I held the shares I was assigned instead of declaring them as losses (rule 1a above). I was using margin and things looked bleak, but now that the market is back up I can unload the shares at any time for a nice profit. It was worth it to ride out the storm.
Some months it can be tough to find a stock to write puts on as I felt they were all overvalued. In this case I may skip a month or two.
HailAMD!
