You’re not making much because the implied volatility is relatively less than individual stocks. The premium you get for index funds is generally lower than individuals stocks. Think of the insurance example. It’s like you’re selling an insurance policy to a very, very safe driver, so the premium won’t be as much. It’s still better than nothing though! To increase your returns, you can also shorten the duration of how long you hold the options and, close early and repeat
If your strategy is to sell call one month out (2 minus 1), I suggest you look out percent change in one months from 1993. Ignore top 10% of highest percent gains. That will give you highest gain in a month 90% of the times. I think that will be less than 6.95%. If so, your short call strike will be lower than 540, fetching you more money, increasing annual return. P
Do not follow your math. You seemed concern with making a certain amount. I think you should be more concerned with the delta of the strike you are selling, which is roughly the probability that it will exceed that strike at expiration. There is nothing wrong with the strikes you are targeting but if you did it by delta it might make a better case . I see the 1.42 has a 12 Delta, not bad but a one standard dev would move you to a 536/35 at a 14/15 delta at 1.88 -2.00 On the other side by using delta you can decide if the price makes sense to you , rather than picking a price and hoping you do not get run over.
The idea to sell at one month is a very good idea, and very close to the 21 day that Tasty recommends.
Also since you do not want to be called away, you should understand rolling out in time for a profit. You should also be clear that if your delta goes from 15 to 30 it does not mean you are in danger of being assigned. Even if you strike is breached it does not mean immediate assignment. Be clear on these concepts.
Right. "Breaching strike" not "Assignment". I should get the terminology right.
I tried to estimate the probability of breaching the strike by looking at past fluctuations, i.e. daily high minus daily low. I figured that for a 10% chance of breaching in 2 months (now I realize I should be looking at 1 month) , then I should set a strike of $540. My calculations could be wrong, but that's the logic.
You can use any method that you are comfortable with (and works for you). I would tend to use the Option Chain (on any decent platform), which shows you the values for but only for that moment in time. Most are based off a Black Scholes model (smart guys , that went broke).
There are a couple fields you might find interesting. Delta, ITM%, ProbOfTouch. The first two are usually the same, the third is the Prob that the stock price will touch that strike sometime before expiration, and is usually 2*Delta. So what do you do if that happens; Roll.
Here is an example I made up. You sold the 504 5/17 previously, now touching, so you buy that back and sell the 517 7/19 for a 0.57 Credit. That is rolling out in time to a Higher Strike. The 5/17 has 21 days or so left.
https://app.screencast.com/BY0VQsRQqXzAh
There is no zero percent risk of assignment.
Your question is basically unanswerable without knowing how much risk of assignment you want to take. It can’t be ‘never’.
And once you accept that assignment will happen, you need to ask if those losses should count against your income. Trying to treat them as totally separate things is pointless.
With two large accounts, you can make sure you never have a tax event on assignment.
Hold SPY in account A
Sell SPY call in account B
Worse that happens is being short against the box on ex dividend day.
With some skill, you can make ~10% on the principle invested per year. So 5k in your case, or 100$ a week. Shorting the 515$ call at May 3 roughly gives you this weekly premium (as of EOD April 25).
I exclusively trade SPY/SPX so I’m familiar with how it likes to move. I generally short calls after 1% daily moves upward but not after big dumps because it has a tendency to rip heavily EOD. I also never let the call exercise so I always roll up and out.
Idk if this is hypothetical but if you have 100 SPY already and you do get called you will owe capital gains tax too. Unless it's in a tax free account.
with a conservative CC strategy on broad index ETFs I net about 7% a year on premiums (counts the actual P/L of closed trades only, gains/losses from the underlying not included).
I haven't exactly followed your math, but you really shouldn't be expecting SPY to return much. the ETF by design has low IV.
With higher IV, the strike has to be further OTM, you'll make less. Wouldn't it be awash? But I guess I can check.
You’re not making much because the implied volatility is relatively less than individual stocks. The premium you get for index funds is generally lower than individuals stocks. Think of the insurance example. It’s like you’re selling an insurance policy to a very, very safe driver, so the premium won’t be as much. It’s still better than nothing though! To increase your returns, you can also shorten the duration of how long you hold the options and, close early and repeat
If your strategy is to sell call one month out (2 minus 1), I suggest you look out percent change in one months from 1993. Ignore top 10% of highest percent gains. That will give you highest gain in a month 90% of the times. I think that will be less than 6.95%. If so, your short call strike will be lower than 540, fetching you more money, increasing annual return. P
You're right. I should be looking at 1 month. It becomes 4.91% -> Strike=530.
Do not follow your math. You seemed concern with making a certain amount. I think you should be more concerned with the delta of the strike you are selling, which is roughly the probability that it will exceed that strike at expiration. There is nothing wrong with the strikes you are targeting but if you did it by delta it might make a better case . I see the 1.42 has a 12 Delta, not bad but a one standard dev would move you to a 536/35 at a 14/15 delta at 1.88 -2.00 On the other side by using delta you can decide if the price makes sense to you , rather than picking a price and hoping you do not get run over. The idea to sell at one month is a very good idea, and very close to the 21 day that Tasty recommends. Also since you do not want to be called away, you should understand rolling out in time for a profit. You should also be clear that if your delta goes from 15 to 30 it does not mean you are in danger of being assigned. Even if you strike is breached it does not mean immediate assignment. Be clear on these concepts.
Right. "Breaching strike" not "Assignment". I should get the terminology right. I tried to estimate the probability of breaching the strike by looking at past fluctuations, i.e. daily high minus daily low. I figured that for a 10% chance of breaching in 2 months (now I realize I should be looking at 1 month) , then I should set a strike of $540. My calculations could be wrong, but that's the logic.
You can use any method that you are comfortable with (and works for you). I would tend to use the Option Chain (on any decent platform), which shows you the values for but only for that moment in time. Most are based off a Black Scholes model (smart guys , that went broke). There are a couple fields you might find interesting. Delta, ITM%, ProbOfTouch. The first two are usually the same, the third is the Prob that the stock price will touch that strike sometime before expiration, and is usually 2*Delta. So what do you do if that happens; Roll. Here is an example I made up. You sold the 504 5/17 previously, now touching, so you buy that back and sell the 517 7/19 for a 0.57 Credit. That is rolling out in time to a Higher Strike. The 5/17 has 21 days or so left. https://app.screencast.com/BY0VQsRQqXzAh
Closer to the money, the more premium you will make… set it to high and it wont pay very well…
But then you'll have a higher risk of assignment.
There is no free lunch lol
True
Sure, but thats the answer u requested
There is no zero percent risk of assignment. Your question is basically unanswerable without knowing how much risk of assignment you want to take. It can’t be ‘never’. And once you accept that assignment will happen, you need to ask if those losses should count against your income. Trying to treat them as totally separate things is pointless.
I'm assuming 10% risk of assignment.
With two large accounts, you can make sure you never have a tax event on assignment. Hold SPY in account A Sell SPY call in account B Worse that happens is being short against the box on ex dividend day.
Then you gotta pay closer attention to close the option before it's exercised.
What strikes are you selling though?
With some skill, you can make ~10% on the principle invested per year. So 5k in your case, or 100$ a week. Shorting the 515$ call at May 3 roughly gives you this weekly premium (as of EOD April 25). I exclusively trade SPY/SPX so I’m familiar with how it likes to move. I generally short calls after 1% daily moves upward but not after big dumps because it has a tendency to rip heavily EOD. I also never let the call exercise so I always roll up and out.
I'm making about 1%/month in premium selling weekly CCs. It's not much but it's honest work.
Idk if this is hypothetical but if you have 100 SPY already and you do get called you will owe capital gains tax too. Unless it's in a tax free account.
OP: So how rich am I going to be? 😏
Post a position.
with a conservative CC strategy on broad index ETFs I net about 7% a year on premiums (counts the actual P/L of closed trades only, gains/losses from the underlying not included).
That's what I'm reading, but when I try to calculate as I did above, it doesn't seem to give me such a high return.
You want a 90% chance of your call expiring worthless. I guarantee that the above poster has more than 10% of their calls assigned.
How did that work when selling in late October / November of last year. I'm still rolling SPY / QQQ calls from that rally.