NaughtyPines

SELLING SPY 221 SHORT CALL (30 DELTA): COVERED CALL EXAMPLE

AMEX:SPY   SPDR S&P 500 ETF
96 0 3
3 months ago
In addition to short- and medium-term trades, I also have an IRA that largely consists of shares in SPY             that I have acquired over a decade plus time span. For the most part, I do one thing and one thing only each month, and that is to sell short calls against my SPY             shares to give me some protection to the downside, as well as reduce my cost basis in those shares. I usually do this at the beginning of the month for the next month's expiry, although I wait on occasion to see if better implied volatility comes in so that I can get more out of the short call. Since I have an oddball number of SPY             shares (i.e., it is not a factor of 100; each call option contract represents/covers in 100 share increments), the sale of the short calls only partially covers my shares, but something is better than nothing.

In the event price stays below the short call, I generally let it expire worthless or close it out for .05 ($5) and then sell another in the next month. In the event it breaks the short call, I roll the call up and out to the next available monthly expiry in which I can receive a credit for the roll.

When I'm ready to acquire additional shares, I either buy them outright on dips or sell a 30 delta short put for a credit with the goal being to get assigned shares at the short put strike or, in the event that price doesn't dip to that level by expiration, keep the credit received -- again reducing my cost basis in the shares acquired to date.

In the example shown here, I would be selling the 30 delta short call, which would pay a credit of 1.63 ($163)/contract and reduce the cost basis of my shares accordingly. For example, if my cost basis in my SPY             shares was $200/share, this would turn out to be a .815% reduction in cost basis or about a 9.78% reduction in cost basis on an annualized basis. Naturally, things never work out exactly in that way; sometimes you get more credit, sometimes less ... .
3 months ago
Comment: Because of the number of shares I hold in this account, I generally don't shoot my entire wad in one expiry. For example, if I had 1000 SPY shares, I would generally sell 10 short calls against, but would not want to sell them all in one expiry. Rather, I "ladder" them, selling 3 contracts in September at the 30 delta strike; 3 in October at that 30 delta; and the remaining 4 in November at the 30 delta, dispersing my shorts over several expiries.
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