Important to understand: It’s about the income stream produced. For example, I sold $18.50 PUT contracts which are likely to be exercised. In that case my cost basis will be $18.50/share. Let’s assume the stock price falls to $17/share and next Monday I have to choose a $17 CALL strike price. Let’s assume the stock gets called away at $17 which will turn my unrealized capital loss into a realized loss.

Why does that not worry me? So, I get the stock called away at $17/share which results in a $1.50/share capital loss. If I can replace the stock, through a PUT, at less than $18.50 then the difference between $18.50 and that PUT strike price cuts the loss. Assume that I can sell $17.50 PUT contracts. This would cut my capital loss to $1/share. Don’t forget I receive a premium for every PUT and CALL sold. On the $18.50 PUT contracts, I received a $350 premium (50-cents/share). If I can receive the same amount on the CALL contracts that is $1/share. Looking back on the previous Transaction Set $720 was received and there was not capital loss or gain. The stream continues.

If the stock price never fails below $18.50 after my stock is called away I would never have the chance to wash out the capital loss. HOWEVER, in this worst case sinario I would recover via the premium income.

One last point, as the stock price goes down my cash on hand will cover more contracts.