Get started

Coveredcall

Opening: XBI Jan '25 77 Covered CallComments: This started out as an October 20th 76 short put (See Post Below) and then proceeded to crater quite massively, resulting in early, random assignment of shares. In an attempt to get my cost basis immediately within earshot of where the underlying is currently trading, I went extremely long-dated and sold the Jan '25 77 for 7.05 against my one lot, resulting in a cost basis of my original short put strike at 76 minus the 7.05 I received for the short call or 68.95 relative to today's closing price of 67.07. The Jan '25 77 short call finished the day at around 43 delta, and -- as with all my covered calls, I'll look to roll out the short call at intervals, with an eye toward keeping the short call at or above the 30 delta and/or leaving it alone if price pops back above my break even. Unfortunately, the position becomes somewhat "dead money" for a bit since the current next available expiries to roll to are limited to June '25, Dec '25, and Jan '26 (although I can certainly roll down intraexpiry if push comes to shove).
AMEX:XBILong
by NaughtyPines
TLT Core Position (IRA)In the absence of some kind of face-ripping rally, I'm going to be assigned shares in TLT here shortly, starting with what began as an October 20th 93 short put and an October 20th 89 short put. Here, I'm using short puts as an acquisitional tool, attempting to acquire shares in multi-year weakness, after which I'll proceed to cover the shares with short calls. The short call premium, along with TLT's monthly dividend, will result in positive cash flow. There are a couple of different approaches I could utilize here to manage the shares I'm assigned, one of which is to sell a call against each individual lot I'm assigned, laddering out short calls in time as I'm assigned shares. Since I've got quite a few contracts subject to assignment, this would result in sort of a covered call spaghetti-works. Another simpler approach would be to see what the average cost basis of all the lots I'm assigned is, and then proceed to sell calls at or above that average cost basis in a single expiry. For example, the average cost basis of the two rungs shown here is (89 + 93)/2 or 91/share. With that cost basis in mind, I would proceed to sell two calls at or above the 91 strike at a reasonably delta'd strike in an expiry that's paying. Given the distance price has pulled away from my likely average cost basis, the calls are likely to be somewhat long dated. Given the fact that my highest short put strike is at 94, I'm more likely to sell calls at 94 initially, wait to be assigned everything that I'm going to get assigned, look at the average cost basis at that point and then adjust the short calls accordingly. Because of its simplicity, this is the approach I'll be going with, looking to stay in the shares and manage the entire position on a fairly long-term basis. As usual, we'll see how it goes ... .
NASDAQ:TLTLong
by NaughtyPines
Producing Recurring Income in GoldGold has long been a darling of investors. Its holders - whether households or central banks - seek refuge in the yellow metal in times of crisis. Gold is a resilient store of wealth, offers durable portfolio diversification, exhibits lower volatility relative to equities & bonds, and serves as an inflation hedge. But it has a big downside. As mentioned in our previous paper , gold pays zero yield. Shares pay-out dividends. Debt earns interest. Property delivers rents. But gold? Zero! There are multiple methods of generating yield from gold. This paper illustrates a risk-limited, easy to execute, and capital-efficient means of producing yield by investing in gold. Innovation in financial markets enables even non-yielding assets such as gold to produce regular income. A class of derivatives known as call options can be cleverly deployed to generate yield. Call options are derivative contracts that allow its buyers to profit from rising prices of the underlying asset. When prices rise, call option holders earn outsized gains relative to the options price ("call premiums"). Unlimited upside with limited downside describes the call option holder's strategy in summary. What has that got to do with generating yield in gold? Everything. For every buyer, the market requires a seller. Options sellers collect call premiums which comprise the income. Many widely believe that options are weapons of mass wealth destruction. Not entirely wrong. Used poorly, options devastate investors' portfolios. Deployed wisely, options help astute traders to better manage their portfolio, generate superior yield on their assets, and construct convexity (disproportionate gain for fixed amount of pain) into their investing strategies. Fortunately, a covered call is a strategy which uses options prudently. As the strategy involves holding the asset whose prices are expected to rally, the risk of the strategy is hedged with risks well contained. Gold Covered Call involves two trades. A long position in gold and a short position in out-of-the-money gold calls. In bullish markets, investors gain from call premiums plus also benefit from increase in prices. Covered calls not only enable investors to generate income but also reduce downside risk if asset prices tank. A covered call trade in gold can be implemented in a margin efficient manner using CME’s Gold Futures and Options. A long position in CME’s Gold futures (“Gold Futures”) gives exposure to 100 troy ounces (oz) of gold per lot. Combining long futures with a short call option on Gold Futures at out-of-the-money strike allows investors to harvest premiums. Selecting an optimal strike and an expiry date is critical to successfully execute covered call strategies. First, Strike. It is the price level at which the call option transforms to be in-the-money. Strikes which have daily volumes & meaningful open interest enable options to be traded with ease and provide narrow spreads. Strikes that make options expire worthless benefits the covered call options holder. Second, Expiry. Options have expiry. Options sellers thrive on shrinking expiry for generating yields. Investors selling call options optimise their risk-return profile by selecting an expiry with higher implied volatility (IV). Option prices are directly proportional to IV. Higher IV leads to larger premiums enriching returns. SIMULATION AND PAY-OFF MATRIX This paper illustrates a covered call strategy in gold using the CME Gold derivatives market: 1. Long one lot of Gold Futures expiring in Oct (GCV3) at $ 2,050/oz. 2. Sell one lot of Call Options on Gold Futures expiring in Oct at a strike of $ 2,275 collecting a premium of $ 40/oz. The pay-off matrix simulates the trade P&L under four likely outcomes among many possibilities at trade expiry: a. Gold rises past the strike ($ 2,400): Options get assigned to the buyer. Covered call option holder incurs loss of $ 85/oz (=$ 2,400 - $ 2,275 - $ 40) from short call offset by profits from long futures ($ 350 - $ 85) = $ 265/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 265 x 100 = $ 26,500. b. Gold rises but remains below the strike ($ 2,250): Options expire worthless to the buyer. Seller retains premium in full. Covered call option holder profits from long futures + call options premium ($ 200 + $ 40) = $ 240/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 240 x 100 = $ 24,000. c. Gold price falls marginally below the entry price ($ 2,030): Options expire worthless to the buyer. Covered call option holder loses money from long futures and thankfully the loss is offset by call options premium (-$ 20 + $ 40) = $ 20/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 20 x 100 = $ 2,000. d. Gold price falls ~5% below the entry price ($ 1,950): Options expire worthless to the buyer. Covered call option holder loses money from long futures and the loss is partially offset by call options premium (-$ 100 + $ 40) = -$ 60/oz . Each GC contract has 100 troy ounces of gold, so total loss will be -$ 60 x 100 = -$ 6,000. The chart below describes the pay-off from Gold Futures (Long position), Gold Call Options (short position) and Covered Call (combination of the two trade legs). MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:GCV2023Education
by mintdotfinance
3
Update (IRA): QQQ February 17th 315 Covered CallComments: Updating to bring this more to the top of my ideas page ... . As of the last roll: Cost basis of 301.72 in my stock with 6.31 of extrinsic in the short call. (See Post Below). Will generally mechanically roll the short call at mopex until my cost basis is below current price, potentially rolling it down further if price pulls too far away from the 315 to pay. Currently, I can roll the short call all the way down to the 302 strike and still make money on the trade, but don't want to short change myself yet. For example, I could do a "nervous Nelly" roll of the February 315 short call down to the February 300 for a 4.41 credit with a resulting cost basis of 301.72 - 4.41 = 297.31. 300 (the short call strike) - 297.31 = 2.69 ($269) (i.e., I'd still have the opportunity to make money on the trade, assuming a finish above 300). Alternatively, I could roll from the February 315 to the March 295 for 8.66, resulting in a cost basis of 293.06 with a max profit of the short call strike (295) minus my cost basis of 293.06 or 1.94 ($194). Point in fact, I could roll it from the February 315 to the June 280 for a 22.59 credit, with a resulting cost basis of 301.72 - 22.59 = 279.13 and still have the opportunity to make money on the trade, although I'd have to wait a very long time for all the extrinsic in the short call to decay out, all for the potential of a 280 (the short call strike) minus my cost basis of 279.13 or .87 ($87). I'm not going to do any of those things at the moment, but just laying out what I sort of look at when making rolling decisions (i.e., how long of duration, to what strike).
NASDAQ:QQQLong
by NaughtyPines
2
KRE June 16th 35/April 21st 55 Long Call Diagonal IdeaDo you ... fade this move? Pictured here is a long call diagonal with the long leg out in June at the +90 delta, and the short leg out in April at the -30 to synthetically emulate the net delta of a covered call position (i.e., long stock/short call) where the short call of the covered call setup would be at the -40 delta strike. Metrics: Assumption: Neutral* to Bullish Buying Power Effect: 15.09 debit Break Even: 50.09 relative to 50.69 Spot Max Profit: 4.91 ($491) ROC%-Age as a Function of Buying Power Effect: 32.5% at max; 16.3% at 50% max; 8.1% at 25% max. Alternative Setups: April 21st 54 Covered Call. (Buy a one lot at 50.69, simultaneously sell the April 21st 54) Metrics: Assumption: Neutral to Bullish Buying Power Effect: 48.09 debit (cash secured); 23.33 (on margin) Break Even: 48.08 relative to 50.69 Spot Max Profit: 5.91 ($591) ROC %-Age as a Function of Buying Power Effect: 12.3% at max (cash secured); 25.3% at max (on margin). April 21st 46 Short Put (25 Delta) Assumption: Neutral to Bullish Buying Power Effect: 5.46 ($546) (On Margin); 44.33 (Cash Secured) Break Even: 44.33 relative to 50.69 Spot Max Profit: 1.67 ($167) ROC %-Age as a Function of Buying Power Effect: 30.5% (on margin); 3.8% (cash secured) As you can see by looking over the metrics, there are various advantages to each setup. With the long call diagonal, the ROC %-age stands out as its positive attribute, but the break even is basically at or near where the underlying is currently trading. With the covered call, the buying power effect relative to the long call diagonal is a bummer, but you start out with a break even below where the underlying is currently trading. The max profit potential of the covered call relative to that of the long call diagonal is comparable, but the ROC %-age in the covered call is lower due to the higher buying power effect, particularly in a cash secured environment like an IRA, where the long call diagonal would be far more buying power efficient. There may, however, be some small advantage to being in the stock: KRE pays a dividend, but it's only quarterly, so it would conceivably pay a distribution in March (the next distribution) and June. The last distribution was .4058 (i.e., $40.58 per one lot), so we're not talking hugely motivating money here. With the short put, your break even is more than $6 below where the underlying is currently trading, but the max profit potential isn't great relative to those of the covered call or long call diagonal. That being said, the ROC %-age at max is comparable to that of the long call diagonal. * -- I classify covered calls and "synthetic covered calls" like long call diagonals as "neutral to bullish" assumption setups due to the ability to reduce cost basis over time via roll of the short call aspect so that you could conceivably make money if the underlying moves sideways.
AMEX:KRELong
by NaughtyPines
Assignment (IRA): QQQ October 21st 300 Short PutComments: The one rung I couldn't strike improve very much with duration, so opted to let this rung go to assignment. I collected a total of 10.46 in credits (See Post Below), so the way I generally look at assignments is that the credits collected of10.46 ($1046) represent a realized gain. Unfortunately, the difference between the strike price (300.00) and current price (275.42) is that it is an unrealized loss. For purposes of tracking my cost basis post-assignment, I look at the strike at which I was assigned as my cost basis going forward, which starts out at 300.00, with credits received in short call premium reducing that over time. I'll look at selling a call against on Monday at the 300 strike, targeting the expiry that is going to pay me 1% or greater of the strike price in credit. Currently, that would be the December 16th 300, paying 5.13, but we'll see what the market does with the underlying post-mopex.
NASDAQ:QQQLong
by NaughtyPines
Opening (IRA): IWM February 17th 193 Covered Call... for a 183.77 debit. Comments: Since I still have broad market short delta hedges on in IWM, QQQ, and SPY, replacing a lot of the long delta I took off yesterday in one fell swoop here with covered calls. Here, I'm selling the short call paying around 1% of the strike price in credit. The 193 is paying 2.10 ($210) at the moment, and I'll look to roll it at 50% max. This isn't the best place to be doing this, since IWM is well off its lows and risk premium has collapsed here, but am just looking to keep my portfolio "net delta happy" for the moment.
AMEX:IWMLong
by NaughtyPines
Opening (IRA): SPY February 17th 407 Covered Calls... for a 391.65 debit. Comments: As with my IWM covered calls, re-erecting long delta that I took off yesterday to offset the short delta of my SPY short delta hedges, targeting the short call strike paying around 1% of the strike price in credit. The February 17th 407 is paying 4.21 at the mid at the moment. Similarly, probably not the greatest spot to be doing this, but just trying to keep my port "net delta happy." I'll only be doing this in IWM and SPY, since I still have some covered call on in the Q's, a March 31st 296, and a June 16th 310 and don't need the long delta there at the moment.
AMEX:SPYLong
by NaughtyPines
Opening (IRA): SPY February 3rd 398 Covered Calls... for a 376.09 debit/contract. Comments: Mixing things up a little bit here and/or attempting to simplify my investment life going forward. Here, I'm targeting the 45 DTE short call strike paying around 1% of the strike price in credit; the Feb 3rd 398 short call is paying a little more than that -- 4.25 ($425). The focus here will not so much be on my "principal" (i.e., the value of my stock position), but how much premium I can bring into my account over time on the short call side of things. Naturally, I will still keep track of my cost basis (376.09/share on fill), since you generally do not want to roll the short call to a strike that is less than your cost basis unless you absolutely have to. I'll generally look to roll out the short call at 50% max to a similarly situated strike (i.e., 45 DTE paying 1% of the strike price in credit) or take profit on the whole setup if it converges on max (which would be 398.00).
AMEX:SPYLong
by NaughtyPines