I’ve enjoyed the rally over the past week and the fact that my account balance is back to within about 2% of my highs of the year. Since we’ve just had a strong multi-day bounce off the recent lows, I figured that we didn’t have too much more upside in the immediate future. I started looking for a moment when stocks were starting to sputter and saw it this morning. I think the upside is fairly limited for the next couple of months and I decided today was a good day to sell covered calls on more of my positions. If I’m assigned, my account balance will be at new highs for the year and I’ll be able to start over with a fresh outlook.
I already sold covered calls on my DIS and IWM shares and wanted to bring in more cash for my SPY and MDY shares. I started with MDY since I was more confident with my decision. While MDY was trading at $257.54 ($0.11 below the high of the day), I sold one MDY December $270 covered call for $2.30 and received $229.75 after paying $0.25 in commission. I knew I didn’t want to go out any further than December and the November options weren’t offering high enough premiums.
Once settled on December, I debated the $265 and $270 strikes. I could’ve pulled in $160 more in premiums, but if assigned, I would’ve missed out on $340. MDY could hit resistance in the low $260, but I could also see a December rally pulling it up to $270, around its 200-day moving average. It was a hard decision and I might end up selling a $265 call within a week or so if it looks like MDY doesn’t have legs. I’ll decide if I want to leave this $270 call in place by then or if I close it for a profit.
I turned my attention to SPY immediately after I placed my MDY order and my new order hit less than eight minutes after the first order. While SPY was trading at $198.66 ($0.32 below the high of the day), I sold one SPY December $203 covered call for $3.63 and received $362.27 after paying $0.73 in commission. I was more aggressive with my SPY order, meaning I used a strike closer to the money, because I was already second-guessing my MDY strike and opted to target a higher premium over leaving more room for the ETF to climb.
Again, December was an easy choice for the same reasons I said above. My debate was over which strike. I compared $202, $203 and $204. I wanted to leave a few dollars of upside before hitting the strike and wanted at least $3.00 of premium. These three strikes fit the parameters, so I just had to narrow it down. I knocked out the $204 strike first because I don’t think SPY will hit $207.08 (strike plus premium) by December expiration. I eliminated the $202 strike because it was only worth $0.47 more and I thought the extra little bit of upside clearance was worth giving up the additional premium. As with my MDY mindset, I might sell a lower strike SPY call if it looks like the market is weakening again.
If assigned on both of these, I’ll take a realized loss on each series of trades. Maybe the potential realized losses allowed emotions to play a role in using higher strikes than I should have. If I move my strikes lower on either, I’ll probably start with SPY since I have a SPY March $195 naked put in play already. Using a lower covered call would help cushion the fall if SPY falls below my put’s strike. For now, I’m glad to have something in place to lock in some profits if the market moves sideways through December.
I tried to sell another 10 TLT naked calls on Friday when the ETF spiked, but got a pop-up that I would be over my margin limits. I was able to sell 10 TLT December $130 calls for a client and she’s up over $800 two days later. I could’ve sold eight naked calls, but figured I would’ve been risking a margin call if TLT shot up much more. I didn’t want to sell five calls, but I should have. It would’ve been better than none. I also could’ve sold a call spread. Instead, I reasoned that my October calls were set to expire in two weeks and I could wait it out and keep my risk somewhat in check.