This is the big capital loss risk on a buy-write. In reality this risk is no different from any share purchase / call sale circumstance (share price goes so low that you want to stop selling calls at all until the share price rebounds).What will you do if stock goes to 500 and stays there? will you sell cc against the buy-write at lower strike than you bought the shares for?
The simple answer to your question - yes. Down at $500 - I probably take a break at -that- point
This risk is no different from selling CSP - the share price drops so far, so fast, that the puts go DITM and you're just rolling month to month (or whatever) waiting for the share price to recover. Or BPS for that matter.
In that sense, nothing different from what I would otherwise be doing. For me that mostly means that I don't buy shares using margin, so I can just hold the shares forever (which is generally what I plan around anyway).
But this particular trade and circumstance - I've been thinking more about that. Here in the 600s and 700s I'm not particularly worried. I'll be selling really aggressive cc's, steadily becoming less aggressive should they never have an OTM (or close) break even or profitable exit as the shares go down. Eventually (at 500 and stays there) I probably stop selling cc at all so I don't get caught out on the rebound. This is a risk, at this share price, that I'm fine with; its not any different from risks I'm already taking on. At such a low price there just isn't much room to drop.
But what if the share price was relatively high? If shares were 1100, do I open a new buy-write at that level? The answer I came up with is 'yes', but the structure will start different. I might buy shares at 1100 and sell the 1050 strike call (making up #s for the idea). Collect say $60 in up front premium with $50 of it ITM. If share price is flat to up, then I bought at 1100, sell at 1050, and collect a net $10 (a fantastic result for me).
If the shares came down to 1070 then I'd still be ITM and close the position. The net would be a short call with $60 entry, $20 exit, or $40 profit (wow!!!!). And if the shares dropped a lot - say 1100 down to 1000, then I keep the $60, and can sell something like the 1000 for another big credit. So I have a good start on rolling down with the shares if needed (credits offset unrealized share losses, to a large degree at least).
Then again I have that same risk with CSP - its just that I handle it differently on this side. I might even go really conservative and sell the 950 strike call for a $153 credit (again, made up example), as I'd be doing with a CSP. If I get a big drop then the income from this buy-write is going to explode - $ for $ for a pretty big window to the downside, while still earning the $3 if the shares are above $1100. H'mm - now I'm wondering if I'm doing something wrong in my math.
I guess the big negative (which will be a positive for me) is that these buy-writes will tend to be held to expiration, waiting for that time value to decay. Or a big move up that shrinks the time value.