After a few days of thinning my holdings this week, I came into options expiration day with only one April option position remaining. My three TLT April $134 calls will expire worthless, about $2.60 out of the money. This trade gives me a realized gain of $312.99.
I mentioned yesterday that I planned to sell more TLT naked calls to replace these when TLT rose some again. I didn’t have to wait long, because TLT pushed steadily higher after opening lower this morning and made it to $131.70, for an intraday gain of 1.33% before settling back some by the close. I timed my trade just under the peak. While TLT was trading at $131.62, I sold five TLT May $134 naked calls for $1.03 each and received $512.88 after paying $2.12 in commission. If I had timed the peak exactly, I think I would’ve only made another $0.01 – $0.02 on each contract – not much of a difference.
Yesterday, I was considering selling three $132 strike naked calls or maybe six $135 strike calls. The net total would’ve been roughly the same for each way I broke it down (3 x 1.7 or 4 x 1.35 or 5 x 1.03 or 6 x .82) and it was just a matter of how I viewed the risk. The $132 calls have a much higher probability of being assigned, but I’d only be short an extra 300 shares. The higher the strike, the lower the probability of assignment and the more shares I was willing to sell short. Also, the higher the strike, the less likely I’d get stuck with a position I couldn’t stomach if TLT hit new highs in the upper $130s.
I decided that since I was already short 700 shares, I should make sure my next lot that I short has a higher sell price. I was willing to raise the number of contracts to five, partly because I wanted to bring in more than $500, but also because it’ll be a good way to average my per share price higher than only three contracts. If I’m assigned 500 shares with an average cost, including premiums, around $135, I’ll try to ride the new shares back down under $130 to make at least $2,500, on top of any covered puts I sell.
I have a weird mindset going on with this TLT position I’m working. If TLT falls, I could go ahead and take my full profit, but I don’t really want it to drop yet. By selling three to five naked calls on top of my seven covered puts each month, I can pull in more than $1,000 per month – not counting the price fluctuations in TLT that don’t matter until I buy my short shares back.
Since I’m not close to a margin call, I haven’t done the math yet to see how many shares I can short. I’m not close to it yet and have no intention of going overboard with shorting new shares unless TLT gets close to $140.00.
Sometimes I look back on options I closed out early to see what would’ve happened if I had waited all of the way to expiration. This week I closed XOM at the right time and saved $100-110 by closing early. I missed out on $15-20 on DIS by rolling early and also missed out on $50-55 by rolling my IWM put early. I knew I was wasting $6 by closing my SSO puts early, but was smart not to write new puts yet since SSO fell $3.30 from where it was when I closed my position. I came out a little ahead by rolling my options early this month, but more important is that I removed a lot of risk early.