Twenty minutes later I closed out SPY at 108.11, S104 puts at .08, and bought back my calls at 1.62 for a net credit of  106.57,  a net profit of 0.41 per share.     With almost half the available profit available that quickly I couldn’t justify holding onto the position.

SPY 31-Aug and 1st of Sept 2010

Livevol shows the 27-Aug 106 IV’s at 28 and the 18-Sept monthly IV for the 106 calls at 24.  Right now, Livevol’s IV numbers are the only ones I believe for the CBOE Weeklys options.

Last Monday, August 9th I felt there was a higher than normal risk of a market pullback,  but there was still the opportunity for making some good profits on the weekly options. Some downside protection seemed like a good idea, and the OTM 111 puts were attractively priced at 0.35.    Late on the 9th  I bought  SPY at 113.01, sold-to-open 13-Aug 113 calls at 0.90, and bought  13-Aug 111 puts 0.35.   Maximum profit on this trade was 0.55 per share, and worst case loss was  1.46.   I had given up 39% of the profit to decrease the downside risk from essentially the entire value of the underlying to 1.46 per share.   Since there was only 4 days left on this trade the remaining  0.48% profit potential was still attractive.

The market dropped off sharply on the 10th.  In cases like this I will often buy back the calls.   If  I think the market is going to keep going down I’ll then sell ATM calls to harvest more premium, or if I think there will be a bounce back  I’ll wait to re-sell the calls, hoping to sell them again at a higher price than I just bought them back at.   In this case I bought back the 13-Aug 113 calls at .53, and later in the day resold them for .79 when the market did rebound a bit.

Wednesday the market really blew off.  I bought back my 13-Aug 113 calls at  0.12 and quickly sold 13-Aug 111 calls at 0.61 which I bought back later in day for 0.39.

Thursday I sold 13-Aug 110 calls at 0.22 and bought them back later at 0.13

Friday I closed out the position early because I was not going to be able to monitor the position the rest of the day, selling the SPY at 108.61 (down 4.40 per share)  and selling the 13-Aug 111 puts at 2.22 (up 1.87 per share)– I left about 0.2 on the table with the puts because I didn’t wait until near close to sell them.

In spite of all my call maneuvererings (which were all profitable)  I was still down 1.18 per share, compared to the worst case loss of 1.46 from just holding the position.   If I had not purchased  the puts I would have been down 3.5 per share,  almost triple the loss I ended up with.

Well, I was clearly wrong about people not being in panicky mood.   Around 10:30 EST the market decided to take another leg down and the VIX did spike up quite a bit.   Later in the day the market rallied back to around the point I created this position.    I bailed out of my position less than an hour after I created it, before the leg down,  because I didn’t like the way the market was acting. Took a net profit of 0.26 per share and was glad to have it when the market tanked a few minutes later.

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This morning’s job report, while worse than predicted, was hardly evidence for Armageddon so I think the early market blow off is probably most of the action for the day.  The relatively small blip in VIX confirms that people are not in a panicky mood–besides, who wants to panic on an August Friday?

I like creating covered call positions when the underlying is right at the strike price.  The ATM calls have their maximum premium at that point, an underlying move in either direction decreases the premium.   I bought SPY at 112.01 and sold 112 strike calls (weekly options expiring today) at 0.50.   Break even is 111.51, and the best case profit is 0.49  (.43%).

The gamma certainly is high on expiration day.  SPY is now at 112.45 and the 112 option premium is down to 0.20.

SPY obliged, and when it reached the 110 to 110.1 range I re-established my short call position with 110 strike calls at 0.49.   This move capped my upside, but lowered my break even on that lot of stock from 110.22 down to 109.81.   I wasn’t optimistic that SPY would recover all the way back to 111 today, and I prefer to have my stock called away so that I don’t have any exposure to weekend events.

SPY closed at 110.27, so all my stock will be called away.  Most of my 0.375 / share profit came from the Thursday position established at 110.12, but I was pretty pleased to still make a profit on my Wednesday 111.07 SPY purchase—compliments of the small insurance policy provided by the call premiums.

I like the way that short term options provide a little cushion against contrary moves, plus generating respectable returns if the underlying goes up or sideways.  The option time premium eroding away gives me an incentive to stick with a position, rather than being tempted to take quick, small profits, or bail out when the market turns ugly.

I really don’t like the asymmetrical risk behavior of covered calls—it severely limits your upside, while providing only a small amount of down side protection.   The good news is that your overall time exposure on the weekly calls is short and if the market really turns ugly your (now) OTM calls will be pretty cheap, even with elevated IV,  if you decide to completely close out your position.

I called the Schwab options desk recently (877-673-7959) and they said that they do plan to offer weekly options, but not for a while.   The person I talked to said it would probably be a month or two.

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.

Some traders avoid options close to expiration because of these factors–and others flock to them.    As a covered call writer I am really attracted to the accelerated time decay of short term options.   I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on.    I will often wait until there is only two or three weeks are remaining on the options to create the position.

Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):

Weeklys on Exchange Traded Funds and equities. As of July 5, 2010, these included the following::

• SPY – Standard & Poor’s Depositary Receipts
• QQQQ – Nasdaq-100 Index Tracking Stock
• IWM – iShares Russell 2000 Index Fund
• GLD – Options on SPDR® Gold Shares
• XLF – Financial Select Sector SPDR
• EEM – iShares MSCI Emerging Markets Index
• C – Citigroup Inc
• BAC – Bank of America Corp
• AAPL – Apple Inc
• BP – BP PLC
• F – Ford
• GOOG – Google Inc.

Fidelity supports trading on these new weekly options, but Schwab does not appear to.   Beware of the listed greeks on these options, the software may not be using the correct time until expiration.

The volume, at least on the SPY weeklies has been substantial (20K today on the 105′s expiring 9-July), so I think the options providers have a winner.

For more information see this options clearing house post.