Writing Covered Calls After the Market Rips

The best time to write calls is after the market rips like crazy.

With the SP500 ($SPY) up 13% from the intraday low 9 trading days ago, now is likely a good time to sell some covered calls against longs.

For investors with a longer time horizon, this is a way to incorporate strength to your advantage without selling your shares or trying to flat out market time.

This strategy is not a hedging strategy (as you are only limiting downside up to the price you sold the option for) but more of a yield enhancement or a way to effectively lower your cost basis out in the future.

Selling covered calls into strength also goes against the tendency people have to want to get more aggressive higher which is super common and usually irrational unless based on a defined momentum strategy.

You also let time work for you selling near dated premium as the price of the option decays increasingly as expiration approaches.

So if the stock you sell calls in has had a huge run over the past couple weeks and merely goes sideways for a while digesting recent gains, you earn the premium over time.

The limitation, of course,  is that if the stock continues to run past your strike price, you will have the shares called and be a forced seller higher (which might not be such a bad thing).

Here’s a quick example. Let’s say you are long the NASDAQ 100 ETF ($QQQ). It has ripped 15% from the October 4 low and you want to take a little edge off the position without selling.

You can sell the NOV 61 $CALL for .45 right now and take .75% off the table. If the stock closes above 61 on November 19, you are effectively a seller at 61.45. That’s another 7% higher from current levels in a little over a month after an already big run.

If the $QQQ rises less than 7%, goes nowhere or falls you pocket .45.

Update: Definitely check out more on a similar theme from Options Maven Steven Place: Opening Covered Calls In An Extended Market