Options Expiration – December 2020

I had two sets of options expire today – one on QQQ and five on TLT. My QQQ December $305 covered call moved in the money earlier this week after being nearly $40 out of the money less than two months ago. I loved regaining value on my share price, but I didn’t want to let the option get assigned. Instead of letting my shares get called away and having a $9,000 realized gain on the shares, I opted to roll the covered call out and up. While QQQ was trading at $309.56, I bought to close my one QQQ December $305 covered call for $4.66 and sold to open one QQQ February $320 covered call for $7.26. I received $258.71 after paying $1.29 in commission for the two-legged combination.

I made a realized gain of $608.71 from my December covered call after I initially sold the call for $1,075.34 net after commission. I also gained $1,486 from the share price appreciation. I’m definitely happy with a 7%+ gain in two months. My new February covered call could earn 5.72% if it is exercised. That’s 32.66% annualized. I’d rather it not be assigned since my capital gains would be close to $10,000. My plan is to keep rolling it higher as long as I don’t think QQQ is going to crash. If I make it to late April, my gain will be a long-term gain, so I’ll be able to stomach the large realized gain much easier. In the meantime, this new covered call gives me an extra 2.35% cushion for the next price drop.

TLT worked in my favor too. My TLT December $152 covered puts expired worthless and left me with a realized gain of $576.31, not counting the $202.87 I paid in short interest and short dividends since I sold the puts. That’s not much to net, but TLT dropped from $161.45 to $156.38 while I’m writing this mid-afternoon. That’s a gain of $2,535 on the price drop. So, it was much better that I didn’t dump my short position in October so that I could regain value as the price of TLT fell.

I think it has more room to fall and decided to give myself more room to profit to the downside with lower strike covered puts. While TLT was trading at $156.41 this earlier this afternoon, I sold five TLT March $149 puts for $2.08 and received $1,038.45 after paying $1.55 in commission. TLT has two more dividend ex-dates before these options expire and I expect to pay $169 in short dividends and $55 or so in short interest. The net gain is still attractive, especially if TLT falls below my strike and I can buy the shares back at $149, the same price I sold them.

If TLT moves in the other direction, I might sell another naked call or two, but I have to watch my margin risk before getting over extended. I plan to do my usual annual withdrawal in a couple weeks to bring my balance back down to $100,000 in this account and I’ll move the profits to my other trading account. I want to see what my leverage ratio is in early January before making my next move. I’ll also have to weigh the risk/reward of putting so many eggs in one basket versus adding an IWM naked put or an individual stock’s naked put.