I've been meaning to do a post for a very long time here on a do-it-yourself quasi-annuity via covered call, and here it is.
To oversimplify things, most annuities involve you making an initial payment, after which you receive fixed payouts, generally represented by an annualized rate of return.
Here, I look at modeling a do-it-youself annuity using a covered call that looks to collect a fixed credit via roll of short call at regular intervals, with the credits received on rolls acting as the fixed payout portion that an annuity would provide, with the drawback being that your "principal" (i.e., the value of your SPY shares) can not only increase, but also decrease over time.
For purposes of this model, I'm looking to start the process by buying a SPY 300 covered call, although you can certainly use any options liquid underlying to do the same thing. This would have cost 289.43 ($28,943) to put on as of today's close, and 289.43 will be your cost basis in your shares. For purposes of this model, I'm looking to generate a 5% return on capital on an annualized basis via premium collection, so 5% of $28,943 equals 1447.15 or about $120.60/month. Consequently, I should look to collect at least that amount in credit for each roll I do or call against I sell. Naturally, 5% ROC isn't the sexiest thing in the world, but would beat the vast majority of broad market or exchange-traded fund sector yields out there at present, and you're doing this to generate a fixed income stream, not blow the doors off the wagon.
And we'll see how that goes ... .
To oversimplify things, most annuities involve you making an initial payment, after which you receive fixed payouts, generally represented by an annualized rate of return.
Here, I look at modeling a do-it-youself annuity using a covered call that looks to collect a fixed credit via roll of short call at regular intervals, with the credits received on rolls acting as the fixed payout portion that an annuity would provide, with the drawback being that your "principal" (i.e., the value of your SPY shares) can not only increase, but also decrease over time.
For purposes of this model, I'm looking to start the process by buying a SPY 300 covered call, although you can certainly use any options liquid underlying to do the same thing. This would have cost 289.43 ($28,943) to put on as of today's close, and 289.43 will be your cost basis in your shares. For purposes of this model, I'm looking to generate a 5% return on capital on an annualized basis via premium collection, so 5% of $28,943 equals 1447.15 or about $120.60/month. Consequently, I should look to collect at least that amount in credit for each roll I do or call against I sell. Naturally, 5% ROC isn't the sexiest thing in the world, but would beat the vast majority of broad market or exchange-traded fund sector yields out there at present, and you're doing this to generate a fixed income stream, not blow the doors off the wagon.
And we'll see how that goes ... .
Trade ist aktiv
Rolling "as is" from July to August for a 4.67 credit. Cost basis of $28,476; total credits collected of $467; You can naturally roll at given intervals, but if you're attentive, you can take advantage of market conditions such that you bring more credit in on roll. Here we had a grind up (with contracting implied volatility), followed by a drop right into the short call strike (with expanding implied volatility), so we're taking advantage of that by rolling here.Anmerkung
Generally, you don't do a ton with these while they're on beyond monitoring extrinsic value in the short call, paying particular attention to it if you're in a dividend month, since the likelihood of your being called away is greater if the extrinsic in the short call is less than the dividend. Here, it's still 10.27, and August isn't a dividend month at any rate. Additionally, you can always look at call away instead of just hanging out in the play. Assuming price stays above 300 through expiry, you'd book a $1542 profit by doing that here (plus whatever you get once the June dividend pays out), which would slightly exceed the modest goal of making 5% on the position on annualized basis. Just for kicks, however, I'll continue to model just hanging out in the position and rolling for the "goal credit." I would model this with my live SPY position, but it's a currently December 260 monied around which I've been selling options, so isn't the cleanest demonstrative setup.Trade ist aktiv
SPY went ex-dividend today for 1.37/share, $137 per one lot. Cash total: $467 + $137 = $604; cost basis of $28,339/break even of 283.39/share.Trade ist aktiv
(Late Post): Rolling "as is" from August to September for a 2.87 credit on this down move into the short call strike and uptick in volatility. While you can naturally just leave things alone running into expiry, it's best to collect maximum extrinsic (which occurs when price is at the money to the short call strike) when you can. Cash total: $891; cost basis of $28,052, 280.05/share. September will be a dividend month, so you will want to keep an eye on extrinsic in the 300 short call running into ex-dividend if the short call becomes monied, and you don't want to be called away. That being said, allowing a call away there wouldn't be bad given the cost basis: 300 - 280.05 = 19.95/$1995, a potential 6.9% ROC for 4 months "work."Anmerkung
As this grinds on, you want to keep an eye on one thing: extrinsic value in the short call. This is easy when it's out of the money, since extrinsic equals the value of the short call. When it's in the money, you either need to make a calculation or have a broker/platform that does it for you. If you need to make a manual calculation, here's the math: strike price + the value of the option - minus the stock price, so here it's 300 + 23.45 - 313.78 = 9.67, so the September 300 short call still has $967 of extrinsic left in it. The primary reason you want to know this is that you generally want to wait until extrinsic approaches $0 to roll. In the case of an out-of-the-money short option, that's generally when it reaches around .05. You don't want an out of the money short to go all the way to $0, since at that point the option will be "no bid," and you won't be able to roll, but will have to wait until expiry for it to expire worthless. This can be wasted time to reduce cost basis/add to cash flow, particularly if the expiry is farther out in time. In this particular case, you would do nothing, since there are oodles of extrinsic left in the option ($967 ain't peanuts).Anmerkung
If you don't need the cash flow brought in by the dividends and short call premium, you can also add a compounding element to the setup by using the cash to buy additional shares. You naturally can't get much SPY for a cash total of $891 at these prices, but will also keep track of that here just for kicks. As of Friday close, you could've picked up an additional 2 shares of SPY at 317.59 for 635.18 (excluding fees), leaving you with $255.82 in cash, 102 SPY shares in total, with a cost basis of (28052 + 635)/102 = 281.24/share.
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Haftungsausschluss
Die Informationen und Veröffentlichungen sind nicht als Finanz-, Anlage-, Handels- oder andere Arten von Ratschlägen oder Empfehlungen gedacht, die von TradingView bereitgestellt oder gebilligt werden, und stellen diese nicht dar. Lesen Sie mehr in den Nutzungsbedingungen.