Overwriting — Trading Ideas on TradingView

OPENING (IRA): TLT APRIL/MAY 159, 161/190 CALL DIAGONAL ... for a 1.83 credit; delta/theta -33.33/3.30. Notes: Here, overwrote 20 delta calls in April and May late in the trading session to flatten net long delta'd covered calls I have on in TLT and to add a little something something to what is now a low yielder from a dividend perspective. As you can see by the chart, we're basically at all time highs since instrument inception, so it wouldn't be the worst stand-alone short I've ever undertaken, particularly since it's out-of-the-money. However, it needs to be looked at in tandem with the covered calls as an overall position and, as such, the entire show is still net delta long (i.e., primary covered calls plus this setup). Additionally, I bought the May 190's in a number of contracts equal to the total number of short call contracts to act as throwaway longs, not only to bring in buying power effect, but to get around the general prohibition against selling naked long calls in a cash secured environment (they were .07 at the mid price, so I'm not giving up much).

OPENING (IRA): SPY CALL DIAGONAL After taking off a similar setup earlier in the day, re-upping with a covered call long delta cutter setup using cheap longs in the September cycle (I paid .07 a piece for them) and shorties in the May, June cycles (for which I received 5.84/contract). At the moment, I bought a few more long contracts than short ones, so that I can add more short call units later if the market decides not to do any of the heavy lifting for me. Previously, I laddered the short calls out quarterly, but longer-dated options' liquidity isn't all that great here, so keeping things on the shorter duration end of the stick. I pick up around -16/contract net delta by doing this, rendering my entire setup flatter, but still net long delta here.

CLOSING (IRA): SPY MARCH 20TH 319, 320, 322 SHORT CALLS ... for a .31/contract debit. Notes: Hard to believe that these were well in the money a few days ago, but they've largely done their job. Over time, I collected 11.70/contract in credits, and am closing out here for .31, so made 11.39 ($1139)/contract, all while protecting my SPY position from most of the bruising it got over the last week. (See Overwriting Post, Below). The downside (if it really is one) is that the entire position has returned to net delta long, although I've still got a QQQ long put diagonal hanging out there (See Post, Below) providing me with some short delta that was erected as a secondary hedge against. The 370's have gone no bid, so will just leave those on to expire ... . Generally, I like to erect these on strength, but may re-up if I can sell calls clear of those all-time-highs and get paid to do so.

TUTORIAL: BUYING POWER EFFICIENT CC OVERWRITING Let's face it. Being in a net delta long covered call in a market downturn can blow. Typically, the vast majority of covered calls are 70-80 net deltas long per one lot, depending on how aggressive your are with your short calls. There are a number of solutions to cutting that net delta to something more tolerable: (a) sell calls; (b) sell short call verticals/diagonals; (c) buy long put verticals/diagonals; or (d) drive your short calls to at-the-money or into-the-money. This post discusses overwriting your covered calls with short call diagonals. While selling calls against is the most straightforward of approaches, many brokers won't allow naked call selling, particularly in cash secured environments like IRAs. Moreover, selling naked against may not be the most buying power efficient of approaches. The short call diagonal not only provides a work-around to the "no naked call" prohibition, it may also afford some buying power relief over going naked. Pictured here is a laddered, short call diagonal, overwrite setup (say that quick three times) in the September, December, and March expiries of SPY with the short options camped out at their respective 20 delta strikes, the longs at "cheap." It pays 6.31 in credit, has a theta of 5.49, and is -53.77 delta. It's naturally applicable to any underlying and can be modified to afford you the amount of overwrite/delta-cutting that you want, even where you're not in a one lot.* You can naturally also just ladder out short call verticals with the short legs at the 20's and the longs at "cheap"; my preference, however, is for getting into the longs once so that I can work the calls as though they were naked if they have to be managed, as opposed to managing a spread. Moreover, I can leave the longs alone throughout the life of the setup and re-use them even if they're no bid as buying power effect cutters, thus saving a bit on fees, since I'm only in and out of a single contract, as opposed to two, as I would be with a spread. As usual, there are pluses and minuses to the setup. The pluses: (1) it flattens net delta, thus smoothing out your P & L in a downturn; (2) it provides additional cost basis reduction on top of any dividends you might be receiving by being in shares and/or with the short calls you've already got covering your shares. The minuses: (1) It ties up buying power to the extent of the width between the short call and long call strikes minus any credit received; (2) the additional short calls have to be managed if tested. * -- For example, the pictured setup would flatten the net delta of a 53 share SPY position to virtually flat, since 53 shares of SPY are 53 delta long and the setup is 53.77 short.