As a fairly new options trader, I am drawn to the covered call, due to its simplicity. I specifically like the "Poor Man's Covered Call" (PMCC), which is simply a diagonal call spread. To trade the PMCC, you buy a deep ITM long call (LEAP) with an expiration "far" in the future. You then sell shorter-dated calls, using the long call as collateral.
I like the PMCC for the purposes of simulating a diversified conventional portfolio. I have a $25K test account. If I wanted to sell covered calls against 100 shares of SPY, the long shares would eat up more than all investible capital! An 80 delta SPY LEAP with ~120 DTE (Jan 21 2022 408 call) only costs $47.60, or 10.6% the cost of one share. Of the $47.60, only ~$6.50 (14% of option price) is intrinsic value.
PMCC "orthodoxy" dictates that you sell 30 delta calls, but I instead sell 50 delta calls, because these have maximum extrinsic value. For instance, in the Oct 15 SPY options chain, the ATM 50 delta call (448) has $5.88 in extrinsic value. The 35 delta call (453) has $2.38 in extrinsic value. The 70 delta call (439) has $4.36 in extrinsic value. So regardless of which way the underlying moves, when I close the trade, I am buying back less extrinsic value than I received in premium when opened the trade. I typically buy back the short call when it goes lower than 35 delta, higher than 70 delta, or is < 10 DTE.
Time decay also works in the option seller's favor. I sell 30 DTE short calls to harvest the steepest part of the theta decay, but wuss out at 10 DTE, when things get squirrely.
I manage risk by managing the net delta of the PMCC. Say that I want $10K (~22 shares = 22 delta) of SPY exposure in a traditional long stock. Since I want to sell 50 delta calls, my LEAP should therefore be 72 delta. If I instead bought an 80 delta LEAP, I would hold 30 net delta, accepting higher leverage/risk.
In a panic, volatility should spike, so if I can(?) sell the LEAPs on the way down as they hit 50 delta, I should at least get a small pop from the increase in IV.
The $25K test account consists of PMCCs on the 11 SPDR sector ETFs, international stocks (EEM/VGK/FXI), bonds (TLT), and GLD. I try to manage risk as stated above, but still end up having more leverage (1.3-1.5x) than "parity". I hold about 55% cash.
I benchmark the portfolio against the SPY and a 60/40 SPY/AGG portfolio. I had a setback in June when GLD took a one-day (3 sigma?) nosedive, and I wasn't managing the risk "correctly" until mid-August. Since then, I've done pretty well, though by observation, my volatility before mid-August was a bit higher than the SPY.
I have found that the PMCC performs very well in a sideways market (3 months of XLI). Synthetic means the LEAP.
The PMCC seems to more or less track the synthetic when it's marching steadily upward (3 months of XLC):
The PMCC has problems for large and abrupt (relative to the premiums collected) moves up or down (GLD through the big drop):
How am I being an idiot?
How am I doing it wrong?
Is this a valid alternative to a traditional portfolio?
Do I have an angle?
Is this a waste of time?
I like the PMCC for the purposes of simulating a diversified conventional portfolio. I have a $25K test account. If I wanted to sell covered calls against 100 shares of SPY, the long shares would eat up more than all investible capital! An 80 delta SPY LEAP with ~120 DTE (Jan 21 2022 408 call) only costs $47.60, or 10.6% the cost of one share. Of the $47.60, only ~$6.50 (14% of option price) is intrinsic value.
PMCC "orthodoxy" dictates that you sell 30 delta calls, but I instead sell 50 delta calls, because these have maximum extrinsic value. For instance, in the Oct 15 SPY options chain, the ATM 50 delta call (448) has $5.88 in extrinsic value. The 35 delta call (453) has $2.38 in extrinsic value. The 70 delta call (439) has $4.36 in extrinsic value. So regardless of which way the underlying moves, when I close the trade, I am buying back less extrinsic value than I received in premium when opened the trade. I typically buy back the short call when it goes lower than 35 delta, higher than 70 delta, or is < 10 DTE.
Time decay also works in the option seller's favor. I sell 30 DTE short calls to harvest the steepest part of the theta decay, but wuss out at 10 DTE, when things get squirrely.
I manage risk by managing the net delta of the PMCC. Say that I want $10K (~22 shares = 22 delta) of SPY exposure in a traditional long stock. Since I want to sell 50 delta calls, my LEAP should therefore be 72 delta. If I instead bought an 80 delta LEAP, I would hold 30 net delta, accepting higher leverage/risk.
In a panic, volatility should spike, so if I can(?) sell the LEAPs on the way down as they hit 50 delta, I should at least get a small pop from the increase in IV.
The $25K test account consists of PMCCs on the 11 SPDR sector ETFs, international stocks (EEM/VGK/FXI), bonds (TLT), and GLD. I try to manage risk as stated above, but still end up having more leverage (1.3-1.5x) than "parity". I hold about 55% cash.
I benchmark the portfolio against the SPY and a 60/40 SPY/AGG portfolio. I had a setback in June when GLD took a one-day (3 sigma?) nosedive, and I wasn't managing the risk "correctly" until mid-August. Since then, I've done pretty well, though by observation, my volatility before mid-August was a bit higher than the SPY.
I have found that the PMCC performs very well in a sideways market (3 months of XLI). Synthetic means the LEAP.
The PMCC seems to more or less track the synthetic when it's marching steadily upward (3 months of XLC):
The PMCC has problems for large and abrupt (relative to the premiums collected) moves up or down (GLD through the big drop):
How am I being an idiot?
How am I doing it wrong?
Is this a valid alternative to a traditional portfolio?
Do I have an angle?
Is this a waste of time?
