SPY vs QQQ - which is better for writing covered call?

[rabbitsfoot]

If we look at Option Contracts for two of the most traded ETFs (SPY and QQQ), SPY is #1 and QQQ os #2. Both of them are fairly liquid.

As of Apr 17th, SPY is trading at $289 and QQQ at $187. So QQQ is trading for about $100 less.

However, if I look at "At the Money" ATM CALL Options for both of them, they don't have much difference in their prices. For example,

JUN 21 QQQ $187 CALL - $5.33
JUN 21 SPY $290 CALL - $5.76

I want to purchase 100 shares of either of them and start writing covered calls. Which one should I go for? Here's what I've researched-

1. Capital required for QQQ is 19k as opposed to 29k for SPY. So cost of owning QQQ is less.
2. QQQ's return over past 1, 3 and 5 year has been more than SPY. QQQ will give me better returns.
3. QQQ's yield is 0.8% as compared to 1.9% of SPY. So SPY would earn me more in dividends.
4. SPY is still heavily traded several times than QQQ. So bid-ask spread there will be tight. So getting on and off CALL options could be little easier in SPY.
5. Both QQQ and SPY have weekly options, so I'll have more flexibility for writing covered calls.


Your thoughts are much appreciated.
Thanks!

 

[LanceJ]

Call writing is about providing liquidity. You earn time for holding something. You can earn more premium by holding something volatile (implied volatility). If the price goes up you have to pay someone to keep your inventory. Would you say the prices of SPY or QQQ have been going up or down?

 

[rabbitsfoot]

Also adding another detail-
IV for JUN 21 SPY $290 CALL - 11%
IV for JUN 21 QQQ $187 CALL - 15.5%

 

[TheBigShort]

You want to write calls on the stock that offers the least upside potential. According to history that means you should sell calls on SPY

 

[rabbitsfoot]

You want to write calls on the stock that offers the least upside potential. According to history that means you should sell calls on SPY

If I'm getting the value of underlying appraised in the process while writing high OTM Probability calls, why is that bad?

 

[TheBigShort]

If I'm getting the value of underlying appraised in the process while writing high OTM Probability calls, why is that bad?

Where did I say it was bad? If you buy an asset that you think has a large potential growth, why would you cap your gains?!! Sell calls on something that has slow and steady growth! (OEX, SPX). QQQ in my opinion has shown some serious growth and may continue to grow at a high pace!

 

[ironchef]

It really depends on how you treat your long side. If your intend is to trade the buy-write as a pair trading, then TheBigShort's approach is what you want. If your intend is to write call against you long term stocks and when call, buy them back, then you are essentially writing a naked option.

Writing calls against long term holding "to generate extra income" was how it got me started back in 2013. I wrote lots and lots of OTM calls against my stocks (low risk-high probability per tastytrade), always bought them back after they were called away. You know what, I netted a loss (as compared to just holding the stocks). To add insult to injury, I ended up paying lots of capital gain taxes. Buy-write as a pair trade can be profitable when compare to cash but they may not beat buy and hold the underlying.

If you don't believe me, run this simulation: Generate a lognormal stock price chart and calculate options using B-S, (Weiner process and Ito lemma), you will find there is no advantage buying or selling options. How do I know? I did that. Fortunately, stock price movement is almost but not exactly lognormal and if you can exploit that you can come out ahead.

B-S assumed flat option IV (lognormal) so if you could extract the non-lognormal part of your chart to trade, you can be very profitable. Fast forward to today, the MM are not dumb, they priced it in so to first order that edge is gone. All you have to do is look at IV skew and IV term structure, everything is priced in. Us retails are doomed. No more easy money.

 

[bln]

No free lunch.. the lowest risk to initiate a covered-call is then then the price is overbrought and at a possible high point. This is also the point in time then volatility usually is the lowest and you get the least premium for your sold calls.

 

[sfwind]

The market is efficient enough to price in the appropriate risk premium. Why not do both to achieve diversification?

 

[rabbitsfoot]

The market is efficient enough to price in the appropriate risk premium. Why not do both to achieve diversification?

The reason why I wanted to start with buying a market fund in the first place was to follow investing guru's advice - over a long term, market fund is always hard to beat. So I wanted to stash part of my savings there but I don't have enough to buy both 100 SPY and 100 QQQs.