But my point which you have not disputed and can't dispute is that a highly leveraged account -- and you had and still have plenty of deep in the money puts and were leveraged at least 6:1 for a long time -- will be hurt badly on a round trip because the leverage is working against you from a higher value after the rise. Your time erosion points will not make up for the bulk of this phenomenon. That became evident when Pfe plunged after rising sharply and your postions went down much faster in dollar terms than they had gone up. I wanted to explain why that was for anybody who might care.
Yes - my holdings were worth much less in March 2008 with the stock around $20.60 than it was at the same price at the December 2005 low.
But leverage had NOTHING to do with that phenomenon - that was strictly caused by my becoming more aggressive at exactly the wrong time.
As you will recall, Torcetrapib failed on 12/1/06 and the stock lost about three points - from $27.86 to as low as $24.80 on a closing basis. But within seven weeks, the stock had made it back all the way to $27.22. Then after a market decline caused the stock to fall back to the $25 area, it started rallying anew and was destined to get to $27.68 as of June 1, 2007.
As this rise was occurring, I was thinking to myself that if even the failure of Torcetrapib couldn't take the stock much below $25, what could? I then thought about Pfizer Minimum Range Theory which had worked for over a quarter century without fail. With the early 2007 low being just below $25 and the stock rallying beyond $27, I felt that the high for 2007 would have to be above $30. And feeling that way, I started writing 27.50, 30 and even 32-strike naked puts. Normally I wouldn't have done that but seeing how well the stock was doing even after Torcetrapib failed enticed me into getting more aggressive.
Of course those new aggressive plays really cost me when the subprime slime and then the once-in-a-lifetime crash ensued a few months later.
It was that mis-timed aggression that caused the March 2008 valuation to be less than the December 2005 valuation. Leverage had nothing to do with it; the mis-timed aggression on my part did.
In all cases where the stock makes a round trip and I hold the bullishness in check, I'm going to be worth MORE at the same price after time has elapsed than I was before the round-trip.
It simply can't be any other way when my long, deep-in-the-moneys hold firm and I have MORE long calls due to covered call writing. And the covered calls and the naked puts are worth less after time has expired.
So how can I possibly lose money over time at the same price UNLESS I do what I did in the spring of 2007?
With my current 290K of Pfizer holdings, I own 499 long options - call it 500 for ease of math. Two points down on the stock would cost me 100K. I also have 59 deep-in-the-money 25-strike naked puts. Call it 60 and two points down on the stock would cost me 12K.
So maximum I could lose 100K on my long holdings and 12K on my deep-in-the-money naked puts with a two-point decline.
But partially offsetting that would be the value of the additional calls acquired with Other People's Money, the greatly diminshed value of the covered calls themselves and profits even with a slight stock price decline over time on naked puts such as the 12.50's for Jan. 2013 of which I have written 160.
So a decline of about 80K or so over time if the stock loses two points overall is about right.
If you somehow think I would lose more, tell me exactly what element would possibly cause that further loss - and be specific.