| Scratching the Itch |
Boredom is the trader’s worst enemy.
Sometimes the itch to DO something becomes quite unbearable and you end up doing something stupid.
I am speaking from experience here!
It has happened to me so many times that I now recognise the symptoms and channel the urge into some action that could hurt me a little if it went wrong – but won’t take me out of the game.
Video
Podcast
Monday 11 May
And that happened on Monday. Everything was going well on the ITM trades, I wasn’t going to touch them, but I was antsy.
The itch was there – I decided to scratch it.
Covered calls would give me some excitement without much risk, so I bought 300 QQQ shares and 300 SPY shares.
That’s a bit hard to read but here is what I bought:
Selling Covered Calls - Expiration
I decided to go 2 days to expiration. Reasoning? Tuesday was too close, Friday too far away, Wednesday was just right. It meant I could buy them back on Wednesday, then sell again with a Friday expiration, get 2 bites at the apple and not hold over the weekend.
Selling to Open (STO) - Strike
- SPY opened at $736.45. I sold 3 $744 calls at $0.99 each ($297)
- QQQ opened at 710.36. I sold 3 $724 calls at $1.09 each ($327)
A grand total of just over $600. Was it worth it?? Let’s see.
Wednesday 13 May
On Wednesday, both were trading below the strike:
- SPY opened at $738.47.
- QQQ opened at $709.96
Excellent – just what I wanted to happen. As they had very little time left on them they were very cheap so rather than waiting for them to expire I decided to buy them back.
Buying Back Covered Calls (BTC)
If you STO (Sell To Open) to get out of the trade you must BTC (Buy to Close). So I duly bought back:
- BTC SPY $744 C @ $0.06
- BTC QQQ $724 C @ $0.04
So it cost $30 to get out of the trade (remember to multiply by 100).
Now let’s see if it was worth it:
Woohoo. Who wouldn’t like $600 for doing (practically) nothing. But, wait, let’s keep it in context.
Percentages tell a different story
To get into the trades cost $434,880, which means the profit % (the only figure that matters) was 614 / 434,880 which works out at 0.14%. Not great. But remember we can do 2 of these per week, or 100 per year which gives us the fantastic annual return of 14%.
Not exactly earth shattering. But let’s try it again.
Still Wednesday 13 May
I’ve lowered my sights a little on the premiums:
- STO SPY $745 C @ $0.81
- STO QQQ $724 C @ $0.76
I am looking at those premiums now, and wondering: what was I thinking?? Let’s see how it panned out.
Friday 15th (Buy to Close)
Well Friday was not the most pleasant trading day, with falls of over 1% on both SPY and QQQ. Clearly the calls were unlikely to finish ITM, so I didn’t buy them back but let them expire worthless.
So how much did I make? The grand sum of $1,085. Not looking a gift horse in the mouth, but let’s look at the % return: 0.25%. On a yearly basis that’s 12.5%.
Not earth shattering – but I can understand anyone saying ‘well it isn’t too bad – better than a bank’ – but there are, as always, some risks involved.
Covered Calls Risks
Not that you will end up in debt (as the calls are covered) but because you may be giving away all your profits.
We’ll look at that next week when we examine the popular ‘Wheel’ strategy. It sounds good in theory – but does it work in practice?
‘Real’ Money
It is funny how (in my mind at least) premiums are different to other profits. When I make a big profit overnight on ITM calls I am pleased, but I don’t automatically think what I would do with the money. It just gets added to the total in the account.
With premiums, it is quite different. I feel as though I have conjured the money out of thin air, so I am justified in spending it.
And usually do.
Strange how the human mind works. Maybe it is just me?
To the markets . . .
Friday was not very nice – it was also monthly options expiry day which probably had an effect on the volume. It also had most of the down in the last 2 hours – a typical expiry day. Apart from Friday, it was a rather nice week.
SPY Charts
Although Friday felt like a big down day it wasn’t all that momentous when you look at the chart. SPY is establishing a nice steady uptrend, let’s hope it continues.
Longer term, it has popped right out of the long term trading channel.
SPYG Charts
SPYG following the pattern of SPY.
Long term it is right at the top of the trading channel.
QQQ Charts
It looks like the 700 level may be significant after all – we’ll see this week.
On the long term we are still out of the trading channel, dropping only slightly.
VIX Chart (Volatility)
ITMeter
The week ahead . . .
Likely to be dominated by Nvidia, the continuing AI capex story, and the arrival of new Fed Chair Kevin Warsh. Markets will be watching closely for any shift in tone from the Fed after Jerome Powell’s departure (as chair – he is still sticking around as a governor). Warsh is viewed as more aggressive on balance sheet reduction and potentially more open to rate cuts later in the year.
Monday – May 18
• NAHB Housing Market Index.
• Earnings: none major.
Tuesday – May 19
• Pending Home Sales.
• Earnings: Home Depot, Palo Alto Networks, Toll Brothers.
Wednesday – May 20
• FOMC Minutes.
• Earnings: Nvidia, Target, Lowe’s, Snowflake, Zoom.
Thursday – May 21
• Initial Jobless Claims, PMI Manufacturing & Services, Existing Home Sales.
• Earnings: Walmart, Deere, Ross Stores, Intuit.
Friday – May 22
• Consumer Sentiment, Leading Economic Indicators.
• No major earnings.
Things affecting the market this week:
• Nvidia – still the key AI stock. Markets want to see whether AI demand and massive infrastructure spending continue accelerating.
• Walmart/Target/Home Depot – important read-through on the health of the U.S. consumer amid higher fuel prices and inflation.
• Bond yields and oil prices remain elevated, increasing pressure on rate-sensitive sectors
Futures
Not looking great – I think it is probably the news on Iran.
Well, let’s hope we are pleasantly surprised.
Heather
Trade the tide not the waves
