About to sell some covered calls; am I doing this right?

Discussion in 'Options' started by 1a2b3cppp, Apr 8, 2011.

  1. I have 936 shares of SPY with an average price of around $126.50.

    I'm planning on selling them at $134.50.

    Since I'm planning on selling them at $134.50, would it not make sense for me to write covered calls on them and get paid to wait for them to hit my target profit?

    Help me determine the strategy to use here. Should I write 9 calls at $134? Or $135 (since I can't do $134.50)? How do I know which month is best? As far as time, I really don't care when it hits $134.50. Tomorrow would be cool, as would a year from now.

    May 134 calls are $2.34, so 9 of them would get me like $2,106.

    Jan $134 calls are $7.80, so 9 of them would get me like $7,020.

    But it might be more profitable to sell 9 at a closer month, and then do it again if those expire, and so on, right? Unless price goes down a lot, in which case $134 and 135 covered calls wouldn't be worth as much.

    I'm sure there's a "right" and a "wrong" way to do this, so help me plan my first option play.

    Am I missing something, or would doing this covered call strategy actually mean I'm being paid to wait until price hits my target profit?
  2. cvds16


    there is no such thing as right or wrong, but in a general sense it's better not to write options farther out than 3 months as time decay is the fastest during these last 3 months and that's what you want.
  3. Do a google search for a handle named riskarb

    He is the best in the business.

    you can Thank me Later.


  4. pberndt


    I agree that you should not go out farther than three months. You want to capture the time decay in a rather short period. Personally I would just sell calls against my 900 shares of SPY and do your trade trying to set up about 5-7& a month return based on the call you sell.

    Also be aware of the dividend that SPY pays and what date they pay their dividend. If you were to be called out on your short calls you would be short 900 shares, which you have to deliver . Yes your covered there...LOL

    What you dont have though is the dividend and you would be responsible for paying it for your 900 shares when called out.

    If this is your first time with a covered call I would only do 100 or 200 shares of SPY for 2-3 months and get the feel of it before committing my 900 shares of SPY.
  5. What strike to write involves a balance b/t choosing projected return (unchanged vs. assigned) and downside protection.

    The more ITM the strike written, the greater the downside protection (DP) but the lower the upside return. The more OTM, lower the downside but the greater the return if assigned. The more bullish you are, the more OTM you write.

    Further out months usually bring in more total prmium but less per day than near months (more DP but less annual return).

    You can diversify your return (and DP) by writing different stirkes and/or different months.

    There is no correct answer, well, at least in foresight. :)
  6. You would be responsible for paying out the dividend on a covered call?
  7. Wait, if you are short calls you have to pay dividends? I know if you are short SHARES you have to pay dividends, but calls? Really?

    So if you BUY options then you get PAID dividends?
  8. pberndt


    If you are called out of the postion and there is a dividend in play at the call out you pay the dividend because your short calls. You are not able to keep the dividend from your long position. You deliver the stock, you deliver the dividend, and you keep the time decay of the options.
  9. 1) If the shares get "called away", (because of having a covered call position), because of an impending dividend, the call option buyer, i.e. the exerciser, receives the dividend from the issuer, not the option writer. :)
    2) The option writer "captures" the remaining extrinsic value in the options. :cool:
    3) ?... ?? .... ! ....based on your username......do you live in the Pacific Northwest? :confused:
  10. You only have to deal with the dividend payout if you are short the stock. You only receive the dividend payout if you are long the stock.
    If you are long/short the option, don't worry about the dividend (it will affect the option pricing somewhat, but you're not paying or receiving any extra cash).

    I think the covered call is perhaps not the best choice in this instance.

    $134.50 is a near resistance on a multi-year high and we are in a bull market, so there may be a decent move to the upside. The covered call caps that out. That said, nothing runs up forever, and the economic situation is best described as turbulent, so we could see a hefty pullback. In that case, the covered call won't do much to offset any substantial move to the downside (gives you a 2-5% protection at best).

    You're already playing with house money, so why not look in to some strategies with more downside protection and also more room to the upside such as some puts (cost more but give unlimited upside) or collars (cost less, but cap your upside)?
    #10     Apr 8, 2011