SPY Technicals Turning Bullish; Sell SPY Covered Calls Options or SPY Cash Secured Puts Options
The strategy is simple. Pick good under valued dividend stocks. I pick stocks with active and liquid options that can be used to generate weekly and monthly income by selling covered calls and puts.
By Donald E. L. Johnson
Cautious Speculator
SPY’s technicals are turning bullish.
Buy SPY and sell covered calls.
And/or sell SPY cash secured puts.
Several possible income trades are suggested.
These are both speculative and income trades for dividend investors who trade options for additional monthly income.
A few weeks ago I sold SPY one-week $438 puts for about $1, or an annualized return on risk (RoR) of about 9%.
That puts option expired worthless, and I banked the premium.
When SPY was $415, I sold another 9-day SPY $439 strike put for another $1.08, or a RoR of about 9.6%. The margin of safety was a risky 4%, and the ETF was assigned to me. MOS equals stock price vs strike price.
The net debit (stock price-puts premiums) was about $437.
On March 2, I sold SPY 3.18.22 expiration (16 days) $440 covered calls for $8.32. RoR will be 1.9%. That amounts to about 30% annualized if I could do the trade 16 times in the next 12 months. I can't because prices change. But I might come close with some discipline and luck.
So my net debit (stock price minus puts and covered calls premiums) is a little under $429. If my SPY is called tomorrow, I win. At this point, it doesn't look like it will be called. The .24 delta suggests that there is a 24% chance my SPY calls will be called tomorrow. If my SPY shares are called, I’ll sell SPY puts as described below.
SPY is $436. Late tomorrow I may buy the covered calls back for less than five cents a share. Or I may let the options expire and roll the covered calls trade forward a week or two.
One trade could be a weekly. Sell SPY 3.25.22 (7 or 4 days) $440 strike covered calls for $3.13 a share on a 100-share option. At this writing, the annualized RoR would be about 28%, give or take. I would sell the $440 strike so that if the stock is called, I will sell it at a profit. That way I could buy it back without violating tax wash sales rules.
A trader who buys SPY at about $436.10, could sell SPY 3.25.22 $436 calls for about for $4.50, or about 46% annualized.
Or sell SPY 4.14.22 $440 calls (delta .43) for $7.48, or an annualized RoR of about 22% with a potential gain of about 1.2% in 28 days. At the moment, the delta suggests that there is about a 43% probability that the $440 strike calls will be called after the options expire on April 14.
An alternative to buying SPY now is to go for a discounted price and a lower net debit. Sell cash secured puts, which is a bullish trade.
For example, a trader might sell SPY 4.14.22 $436 puts (delta -.49) for about $11.50, or about a 33% annualized RoR.
Or if, income is the primary goal, do a trade that is less likely to be assigned.
Sell SPY 4.14.22 $405 (delta -.18) for about $3.73, or about a 11% annualized ROR with a margin of safety of about 6.9%. Lower strikes offer a bigger MOS and lower RoR.
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LINKs:
Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees.
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A video on how to place options trades on Think or Swim.
Beware
Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I own SPY and have options positions on it. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content.
@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.
Did you consider today's ex-date for SPY?
Hi Don. Just so that I understand when reading your comment here. "When SPY was $415, I sold another 9-day SPY $439 strike put for another $1.08, or a RoR of about 9.6%. The margin of safety was a risky 4%, and the ETF was assigned to me. MOS equals stock price vs strike price."
I never had considered selling a PUT that deep into the money. Am I reading that correctly?
If that PUT gets assigned to you and the price of SPY stays at around $415, you have potentially lost $1,400 minus the premium.
For example, if I sell a PUT today on SPY at the current mark of $437, then if I move into the money to $460, for March 28th. And if SPY stays at $437 or lower, the up front premium on that trade is $2134, but my potential loss is $2,400 or greater, minus the premium I earned up front.
Why would I want to design this trade so that it almost guarantees that I get assigned that stock at such a high cost? Even though the premium is healthy?
Am I looking at this, your trade correctly?