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Drawdown math: what one bad stock does to a five-name book

A drawdown is how far your account falls from its high point. For an option seller, it usually comes from one or two stocks that fall hard while every other trade pays small premiums. Here's a five-name book where one stock drops 30%, worked out to the dollar.

Options guide · 9-minute read · Updated 2026-10-27

The short answer

In a book of short puts, the premiums are small and spread out. The losses are large and arrive together. In the example below, one stock falling 30% loses $3,000 on its shares. That's as much as three full rounds of premium from all five stocks.

And losses take more to recover than they took to make. A 30% drop in a stock needs a 43% rise just to get back to even. That arithmetic is why sellers size each stock small and cap how much they have open.

The setup (an illustration, not a trade idea)

A hypothetical account of $50,000. You run the wheel strategy on five made-up stocks, A through E. Each trades at $55.

• On each stock, you sell two 30-day $50 puts for $1.00.
• That's $200 of premium per stock and $1,000 for the round.
• Each stock ties up $10,000 (2 × $50 × 100). All five tie up the full $50,000.

Every number here is round and made up. The point is the shape of the result, not the size of any premium.

The month one stock falls 30%

Stocks A to D drift sideways. All four sets of puts expire. Stock E reports bad news and closes expiry day at $35. That's 30% below your $50 strike, and about 36% below where it started.

Notice the shape. The good trades each made $200. The bad trade lost fourteen times that.

When more than one stock falls

Stocks often fall together, in a sector slump or a market sell-off. Here's the same book with more names down 30% from the strike.

The top row is what a good round looks like. Every row under it is what a bad one looks like. You need many top rows to make up for one of the others. Our scenario page on the market crashing with five puts open walks through that last row.

The arithmetic of climbing back

A loss shrinks the base you earn on. So getting back needs a bigger percent than you lost.

For stock E, getting from $35 back to $50 is a 43% rise. Until then, you're holding 200 shares at a loss.

Why premium refills the hole slowly

After the bad month, you hold 200 shares of E and four stocks still selling puts. Say the next round pays the same $800 on A to D. On E, calls at your $50 cost basis pay almost nothing with the stock at $35. Calls near $40 pay a little, say $0.40, or $80 for both contracts.

• Next round, if nothing else goes wrong: about $880.
• The book's hole: $2,000.
• Rounds to fill it: a bit over two, if every one of them goes well.

And there's a trap here. Selling E's calls at $40 means that if E bounces, your shares are called away at $40: a locked-in loss of $10 a share, or −$2,000 on the 200 shares. The strike-below-cost trap explains that choice.

The rule for next time

You don't control which stock falls. You control how much one stock and all stocks together can cost.

1. Cap each stock. In this book, each stock was 20% of the account. A 30% fall cost about 6%. Halve the cap and you halve that. See sizing math, the full obligation rule.
2. Cap the total. All five names tied up the whole account. Keeping part of it unpromised gives you room on the bad day.
3. Spread the risk. Five stocks in one sector behave like one big stock. See diversifying a wheel portfolio.
4. Write your drawdown limit down. Decide in advance the account level where you stop opening new trades and review. Pick it when you're calm.
5. Check the dollar loss, not the premium. For every trade, write the result if the stock falls 30%.

Account note: in Canada, covered calls are widely allowed in a TFSA or RRSP, while cash-secured puts depend on the broker, and options permissions differ by broker. Losses inside a TFSA can't be claimed against gains elsewhere, so sizing matters even more there. General information, not tax advice; check with a tax professional or your broker.

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