JT> short call strategies
in mid-DEC I started playing with a more-or-less classic "textbook" index underlying (MDY or QQQ) holding where you "leg into" selling CALLs at apparent tops.
the essential idea was to maintain a $100K position of the underlying, for example, I buy 1800s QQQ at 55.56 (or under) and call it, record this as "1800s QQQ @ 55.56 PAR thus".
As the NDX rises, I'll sell 100s lots of QQQ at PAR points, for example: sell 100s @ 58.8 = 1700s QQQ at 58.8 PAR thus = $100k; and, sell 100s @ 62.5 = 1600s QQQ at 62.5 PAR thus; etc. This maintains a $100K underlying position.
Then, at some apparent TOP, say ~68 (the last time I did this) I have: 1500s at QQQ 66.67 PAR thus; I have 3 x 100s sales of QQQ @ 58.8, 62.5 and 66.67 = ~$18K CASH:MM% profit; and I sold 15 near-month, FEB63C @ 7.x
...which I bought-to-close at 60~63 for around a buck; ie., a ~10% decline from short-term TOP.
I've had/noticed two problems with this approach.
First, a 10% downside "textbook" hedge of NDX is not deep enough, and there is very little, if any time-value premium available by going any deeper (say, selling QQQ FEB58C when the price of QQQ underlying is ~68). The implication being that I would have been better off selling the entire 1500s position @ ~68 apparent TOP and buying a long PUT.
Second, as the textbook does point out, covered CALL writing ~ even if it is "clever" or, well-timed at apparent TOPs ~ will only succeed if the underlying is fundamentally growing; ie., does not make "lower lows", thus producing more decay in the underlying than can be recovered by ANY short CALL strategy.
nonetheless, I've got about +15% gain over the last two options expiry cycles (JAN & FEB), it's easy to see the gains because they are the $15K CASH:MM% balance; but I'm disappointed because at one point the account was, "$100K of QQQ + $30K CASH:MM%"...
so, I conclude that ~ in light of "no growth" ~ we are probably better off using at the money options to ride WAVES up and down; ie., LEAPS require an UpTrend or, at the very least stationarity + clever timing ~ and so do "textbook covered call strategies".
-Steve |
