Recap on SPY weeklies —and some observations

After creating a position with SPY on Wednesday at 111.07  I added to my covered calls on Thursday, buying SPY at 110.12, selling 110 strike calls  at 0.71.   At one point this morning (Friday) , when SPY was off to about 109.5 my 111 strike calls had dropped from Wednesday’s 0.83 to 0.08.   These strong moves are characteristic of options with only a little time left on them.   With so little premium left on these options I decided to close them out and hope the bounce happening at that point would continue.

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.


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