Generally speaking, covered calls are set up by acquiring stock and then selling calls against, not only for downside protection, but also to reduce cost basis. Most of the time, you want to sell out of the money calls against, since short calls generally have the effect of capping off gains if you're not inclined to roll them out for duration and strike improvement.
In certain cases, however, I'm looking for more downside protection, a lower cost basis out of the gate, or want a setup that is primarily designed to capture dividends and not much else.
Pictured here is a Dec '21 215 monied covered call in SPY* with a mid price of 209.97, which is about 70% of the price at which SPY is currently trading. It's got $515 of extrinsic in it, has a delta of 10.13,* and its max profit potential is the short call strike (215) minus what your fill price (209.97) or 5.03 ($503 for a one lot). An additional piece of information is that SPY has an annualized dividend of 5.42/share or $542 for a one lot, which would represent a 2.58% yield as a function of your cost basis of 209.97, assuming that the annualized dividend remains fairly constant over time.
Because the short call is in-the-money, you're subject to call away at any time, in which case you pocket the difference between your cost basis and the short call strike immediately, plus any dividends you've collected before that occurs.
In the mean time, you generally do nothing, as long as the short call remains in the money, merrily collecting your quarterly dividends and hoping that some Big Dick calls you away early, at which time you re up the setup. Naturally, in the event that we do sell off to below your short call strike, you proceed to manage it as you would any ordinary covered call, taking comfort in the dividends you've collected to date and that you didn't buy in at the top with all the other FOMO/MOMO folk. Naturally, due to the capital requirements and returns associated with the setup, it will not be for everyone; it's for the very conservative investor who isn't willing to buy into these valuations, wants to get into SPY at substantially lower prices than where it's currently trading, wants to get paid to wait, and/or wants tons of room to be wrong while still make some money at it.
* -- As compared to an ordinary covered call, this setup is virtually "flat" from a net delta standpoint. Most covered calls are 100 delta long stock minus 20 to 30 delta short calls for a net delta of 70 to 80. From that standpoint, movement in the underlying is likely to be softer from a P&L standpoint versus the movement of an ordinary covered call, which will help the most conservative investors sleep better at night.
** -- I've also done these in other dividend-generating underlyings (e.g., IYR, HYG, EMB, etc.), but not all instruments have the liquidity that SPY has, particularly in deep in-the-money, long-dated short calls.
In certain cases, however, I'm looking for more downside protection, a lower cost basis out of the gate, or want a setup that is primarily designed to capture dividends and not much else.
Pictured here is a Dec '21 215 monied covered call in SPY* with a mid price of 209.97, which is about 70% of the price at which SPY is currently trading. It's got $515 of extrinsic in it, has a delta of 10.13,* and its max profit potential is the short call strike (215) minus what your fill price (209.97) or 5.03 ($503 for a one lot). An additional piece of information is that SPY has an annualized dividend of 5.42/share or $542 for a one lot, which would represent a 2.58% yield as a function of your cost basis of 209.97, assuming that the annualized dividend remains fairly constant over time.
Because the short call is in-the-money, you're subject to call away at any time, in which case you pocket the difference between your cost basis and the short call strike immediately, plus any dividends you've collected before that occurs.
In the mean time, you generally do nothing, as long as the short call remains in the money, merrily collecting your quarterly dividends and hoping that some Big Dick calls you away early, at which time you re up the setup. Naturally, in the event that we do sell off to below your short call strike, you proceed to manage it as you would any ordinary covered call, taking comfort in the dividends you've collected to date and that you didn't buy in at the top with all the other FOMO/MOMO folk. Naturally, due to the capital requirements and returns associated with the setup, it will not be for everyone; it's for the very conservative investor who isn't willing to buy into these valuations, wants to get into SPY at substantially lower prices than where it's currently trading, wants to get paid to wait, and/or wants tons of room to be wrong while still make some money at it.
* -- As compared to an ordinary covered call, this setup is virtually "flat" from a net delta standpoint. Most covered calls are 100 delta long stock minus 20 to 30 delta short calls for a net delta of 70 to 80. From that standpoint, movement in the underlying is likely to be softer from a P&L standpoint versus the movement of an ordinary covered call, which will help the most conservative investors sleep better at night.
** -- I've also done these in other dividend-generating underlyings (e.g., IYR, HYG, EMB, etc.), but not all instruments have the liquidity that SPY has, particularly in deep in-the-money, long-dated short calls.