Covered Calls: A running thread

I periodically do covered calls on certain stocks with good dividends and somewhat decent price. Mostly I aim for 15% return and 30% downside protection, but with VIX < 13, it is difficult to achieve especially with dividend paying stocks. So one has to make some compromise, which I dearly hope will not come back to haunt.

So I will discuss some of the covered calls in this on-going thread. Most of these are done in IRA, so I don’t have to worry about tax consequences for the option premium and dividend. I try to write at least 10 covered calls with a total capital of $100 K, these are in addition to writing covered calls on the stocks I own as part of core long-term holding. If the story doesn’t change, I might rotate or even take the shares, if the stock declines. Otherwise, always happy to let them go. This also allows me to close and release capital if compelling opportunities arise.

With that, the first one is Target. I have elsewhere talked about this stock. Target stock is steadily raising after last earnings report. I think the stock will run further.

I have sold 1 contract of Jan 25 $125 covered call for net price of $116.35. The quarterly dividend is $1.1 and if the stock is not called before the expiration date, you can earn 4 dividends. Including dividends, you can get 11.85% annualized return with 21% downside protection.


So you sell what I would consider long contracts, in this case expiring Jan 2025, 11 months from now. I do somewhat like you do, but focus on short term call options that a) will execute only if the stock increases 20% or more (sometimes as low as 10%), b) with a 20% annualized return on the value I lock up for that time (sometimes as low as 10%), and c) where my premium earned is at least $100.

I also avoid selling options on my core investments (those stocks I think will give me the greatest returns) except here and there when I would sell a portion anyway to avoid any single stock becoming too large a proportion of my portfolio.

With those parameters I sell a lot fewer options than you do, but still pull in what I consider a decent income through the year.

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Different goals. My goals are

  1. Significant downside protection
  2. Depending on the market, stock performance, I will rotate, roll up, sometimes outright close and go long on the stock
  3. Instead of carrying cash, I do these trades. So when I need cash I can close and release cash. Remember these are within IRA, where I cannot add cash, so if I need to buy then something I have to sell.
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Wouldn’t it have been easier to simply sell a Jan '25 125 put? Keep the cash that you would have spend to buy the stock, put it into a ~5% T-bill or similar. Pocket the $7.XX premium now. If TGT is under 125 next January, you own the stock at about 117 or so. If it’s over 125, you keep the premium and it expires worthless. The nice thing about this alternative is that you don’t need to do anything at all to close the trade, it is self-closing. And it requires much less invested capital, your trade needed $116.35, this one simply adds $7.XX cash to your account now, and ~5% of $124 over the next year (obviously it has an effect on margin, but as you said, it’s an IRA and the money is sitting there in the account anyway).

By the way, I’m not sure if I would do this trade with TGT. Downside protection of 21% isn’t all that much considering that less than 3 months ago the stock was under $110 (below the downside protection level).

Unfortunately in brokerage IRA you can move money only to your sweep option, or you lock the money in Bonds or CDs. At E*trade it is even more painful as you have to move the money to Morgan Stanley.

Fair point. Normally I would not. After last earning the stock gaped up to $125 and I expect the stock to continue to do better. With Target I am prepared to take the share if it goes below $125. This is a stock I owned from 2018 until May 2022. After that bad earnings I sold and I am trying to get back into the stock :slight_smile:

Lastly, with the current low VIX, not much opportunities, for ex: with Berkshire you get only 7% even if you with 15% downside protection the last time I checked it was < 8%.

This is not true in my experience. I buy T-bills every week in my brokerage 401k (and in my brokerage IRA). I’ve been buying short 4-week T-bills recently, and rolling the cash every 4 weeks, to capture that sweet 5.39% yield (its ranged between 5.375% and 5.436% in recent weeks) on the cash held in those accounts (partially to cover the margin required for various naked puts and other option combinations).

The low VIX is indeed a problem. I used to sell puts regularly on BRKB as a method to potentially buy more shares. Most of the time those puts expired worthless, but sometimes they were assigned. My most recent assignment on BRKB puts were the March '23 305s. And I haven’t found any BRKB puts worth selling since last summer.

Then it’s a good trade for you! In general, EVERY TIME, I will only sell a put if I am truly willing to own the stock at that price (strike minus premium). Because it WILL happen every 3, 4, 5, or 10 trades, that you will end up owning the stock at that price. If I am just speculating on direction then I would use a spread instead.

Question for you. Are you buying a full Put or are you doing a mini (which I thought were no longer available outside of ETFs)?

When minis went away, I stopped doing puts for many stocks because it was too expensive for me to randomly be forced buy 100 share if it was exercised.

Do you sit on the strike price in cash or do you have time to raise funds in the case of the BRKB put being exercised?

Please note my caveat, if the price goes down because of general market decline, not because the story changes. When the story changes, I close and move on. I already own couple of “turnaround” projects that are turning around forever. So, now I am willing to take quick losses.

A full put. I’ve never traded minis. Obviously because BRKB is a relatively high priced stock, I can only trade them in low numbers. I always choose strikes that have good enough liquidity (so I get a fair price). But 90+% of the time I never buy the put back anyway, so liquidity isn’t an issue, they simply self liquidate on the expiration date (or rarely earlier).

It depends. In tax-deferred accounts, no new cash can be added, so I am rather conservative there. In my taxable account, because I have very high expenses for the next 3-5 years, I have a much higher cash level than is usually prudent to have. So, for now, there is always excess cash in those accounts. That cash is mostly in the form of T-bills because those have the highest yields right now, and a few CDs that have been maturing (I am sad every time a 5.55% CD matures because you can’t get that rate anymore). Because I roll T-bills every week, if I need to raise cash (real cash, not margin in the account), all I have to do is skip doing the rollover when necessary.

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