Sold TLT Option Combo – Naked Calls & Covered Puts

Idiot governors, such as my state’s Governor Kemp (Georgia), might make my trades today poorly timed. By opening up the state from our lockdown while cases are still trending higher, we can expect a sharp increase in COVID-19 cases again. That’s the general consensus, but the hope is that my fellow Georgia citizens are smarter than our governor and won’t fill bowling alleys, gyms, churches, and salons too quickly. I recognize that being smarter than Kemp is a low bar to beat and that’s why I’m hopeful.

My plan from the beginning was to sell puts to go with my short position if I was assigned my first round of TLT naked calls. I also planned to add more naked calls if TLT ran much higher. Today, I acted on both of those plans with two more legs to my option trades. I started with more naked calls to take advantage of the $2.50+ rise in the ETF’s share price. While TLT was trading at $171.07, I sold five TLT June $180 naked calls for $3.50 each and received $1,743.83 after paying $6.17 in commission.

TLT reached an all-time high of $179.69 on March 9. That peak was right at the open and within 30 minutes, TLT was down more than $3 from that mark. I don’t think we’ll see TLT back to that range before my options expire, but didn’t want to take the risk of selling a lower strike in case I’m wrong again. If TLT trends lower, I have the shares I’m short to profit from rather than adding unnecessary risk. If TLT trades above $180 and I’m assigned the naked calls, I expect the spike will be short lived and I’ll profit as TLT moves back to its recent trading range between $163 and $170.

Not factoring in the premiums I’ve received, my average cost per share if assigned these new naked calls would be $164.50 and would make it much more profitable to sell $155-160 range covered puts. I could see TLT back in the $137-143 range within a year, but I’m not sure I’d hold on that long instead of taking a profit and moving starting over.

Even though I don’t think TLT will fall too fast, I wanted to leave the door open to profiting if the share price drops by early summer. While TLT was trading at $171.49, I sold five TLT June $145 covered puts for $0.58 each and received $288.41 after paying $1.59 in commission. I call these covered puts because they cover the 500 shares that I’m short. (Some traders might refer to puts they have cash backing as “covered puts”.) If these new short puts are assigned, my short shares will be bought, and I’ll exit my position with a nice profit.

My only goal with selling these puts was to cover the dividends I’ll be forced to pay on my short shares. It looks like the May and June dividends will be $0.27 and $0.28. This means I’m not really profiting much at all from that leg of the trade, but I’m also not losing money by paying the dividends. The June $149 puts (if I wanted to exit at the same price I was assigned the shares) were only trading around $0.25 higher. I thought the possibility of making $4 more per share was worth missing out on $0.25.