THE MONTH AHEAD (IRA): BROAD MARKET OVERWRITING IN QQQ
My IRA is a basic Boglehead setup, along with some little tweaks. Primarily consisting of SPY, TLT, EFA, and IYR covered calls, it's about as Plain Jane as one can get, although I've got some acquisition-oriented short puts hanging out there in XLU, XLP, and HYG.
As any covered caller or short putter knows, these setups are going to be long delta all the time, so every opportunity you can take to shorten that delta can work to your advantage, smoothing out market gyrations' effect on your P&L, and potentially more rapidly reducing your cost basis over time. Conversely, attempting to shorten delta can bite you in the ass if you get overly aggressive, with the end result being a bunch of monied covered calls. As I've pointed out on occasion, however, having monied on may not be a bad thing, depending on how risk adverse you are and how much tolerance you have for big swings in the market.
In this particular cycle, I'm looking to add short delta on strength, primarily to flatten the net long delta in my SPY position, in which the portfolio is overweighted. I've already done some of this on previous strength, with a laddered call diagonal setup that overwrote calls in the September, December, and March cycles and capped off buying power effect with some cheap long calls out in March. (See Post Below). This will also indirectly hedge off some of the EFA long delta, as it, too, is broad market, and is likely to experience a sell-off if SPY does, given its .71 3-month correlation with SPY, and -- to a lesser degree -- IYR's long delta, since it is less broad market correlated (.41 3-month with SPY).
Here, I'm looking to do some more delta cutting, but am looking instead at QQQ's, which appear to be slightly stronger than SPY at the moment. Since the broker treats these overwrites as "standalone trades" for purposes of margin, it makes little difference if I shop for short delta directly in SPY versus another broad market instrument or, in fact, any underlying that is strong relative to the broader market, at least from the standpoint of buying power effect. However, I generally like to keep apples with apples and oranges with oranges, so prefer overwriting broad market with broad market, and not single name, although single name is certainly a viable option to the extent that it's closely correlated with the broad market. Generally speaking, after all, the entire market becomes closely correlated in a sell-off, so it is unlikely to make a huge difference if I overwrite in QQQ's at or near all-time-highs, or in (insert stock symbol here) that is at all-time-highs and is closely correlated to the broad market.
As before, I'll be looking to ladder out, selling similarly delta'd short calls with a set of back month long calls put on for cheap to bring in buying power effect, ideally with QQQ's touching or breaking those all-time-high's at 195.50 or so.
Preliminarily, I'd be selling the December 201's, the March 208's, and the June 213's (all 20 delta in their respective expiries), and buying 3x the June 238's for around -50 worth of delta cutting and a net credit of 5.80/setup or so. Alternatively, I can "cut for cheaper" with a long put diagonal, buying the 90 delta 218 out in June and selling the 30 delta 180 in November, for a much smaller buying power effect and -60 delta's worth of cut per contract.
Naturally, I need the QQQ's to get back to those all-time-high's first. If they don't, I'll re-evaluate ... .
As any covered caller or short putter knows, these setups are going to be long delta all the time, so every opportunity you can take to shorten that delta can work to your advantage, smoothing out market gyrations' effect on your P&L, and potentially more rapidly reducing your cost basis over time. Conversely, attempting to shorten delta can bite you in the ass if you get overly aggressive, with the end result being a bunch of monied covered calls. As I've pointed out on occasion, however, having monied on may not be a bad thing, depending on how risk adverse you are and how much tolerance you have for big swings in the market.
In this particular cycle, I'm looking to add short delta on strength, primarily to flatten the net long delta in my SPY position, in which the portfolio is overweighted. I've already done some of this on previous strength, with a laddered call diagonal setup that overwrote calls in the September, December, and March cycles and capped off buying power effect with some cheap long calls out in March. (See Post Below). This will also indirectly hedge off some of the EFA long delta, as it, too, is broad market, and is likely to experience a sell-off if SPY does, given its .71 3-month correlation with SPY, and -- to a lesser degree -- IYR's long delta, since it is less broad market correlated (.41 3-month with SPY).
Here, I'm looking to do some more delta cutting, but am looking instead at QQQ's, which appear to be slightly stronger than SPY at the moment. Since the broker treats these overwrites as "standalone trades" for purposes of margin, it makes little difference if I shop for short delta directly in SPY versus another broad market instrument or, in fact, any underlying that is strong relative to the broader market, at least from the standpoint of buying power effect. However, I generally like to keep apples with apples and oranges with oranges, so prefer overwriting broad market with broad market, and not single name, although single name is certainly a viable option to the extent that it's closely correlated with the broad market. Generally speaking, after all, the entire market becomes closely correlated in a sell-off, so it is unlikely to make a huge difference if I overwrite in QQQ's at or near all-time-highs, or in (insert stock symbol here) that is at all-time-highs and is closely correlated to the broad market.
As before, I'll be looking to ladder out, selling similarly delta'd short calls with a set of back month long calls put on for cheap to bring in buying power effect, ideally with QQQ's touching or breaking those all-time-high's at 195.50 or so.
Preliminarily, I'd be selling the December 201's, the March 208's, and the June 213's (all 20 delta in their respective expiries), and buying 3x the June 238's for around -50 worth of delta cutting and a net credit of 5.80/setup or so. Alternatively, I can "cut for cheaper" with a long put diagonal, buying the 90 delta 218 out in June and selling the 30 delta 180 in November, for a much smaller buying power effect and -60 delta's worth of cut per contract.
Naturally, I need the QQQ's to get back to those all-time-high's first. If they don't, I'll re-evaluate ... .
