Options Expiration – February 2021

Coming into today’s option expiration, I only had one February option set to expire and it was in the money beyond the premium I received. While QQQ finished the week more than $7 beneath its high from just three days earlier, it wasn’t enough of a drop to turn my covered call into a profit.

While QQQ was trading at $333.25, I bought to close my one QQQ February $320 covered call for $1,325 and paid $1,325.63 including $0.63 in commission. I received $725.35 for this call when I sold it in December. QQQ was trading at $309.56 back then. So, while I had a realized loss of $600.28 on the option, I gained $2,369 on paper for the underlying ETF.

I don’t mind some losses on options when I’ve sold them that far out of the money and they finish in the money. Of course, I left money on the table, but I made a good return and kept my risk in check. Any trader who expects to maximize profits on every trade is going to drive himself crazy.

Soon after my closing trade went through, while QQQ was trading at $333.37, I sold one April $345 covered call for $6.54 and received $653.35 after paying $0.65 in commission. If this call is assigned, I’ll earn 5.45% in just eight weeks. That’s 34.98% annualized. If QQQ miraculously finished April expiration at the same price as it was this afternoon, I’ll still earn an annualized 12.58% from the option alone.

I only gave myself a cushion of 1.96% from a loss if QQQ moves lower, but I wanted to leave more upside room for further price appreciation, so something had to give, and it was my loss protection. Also, I wanted to reduce the risk of an assignment more than a lower strike would set up for. I bought these shares on April 17, 2020. That means if my covered call is assigned, I’ll be two days shy of turning my gains on the underlying shares into a long-term gain. I have more than $10,000 paper gain on the shares. The difference between a short-term gain and a long-term gain is enough of a tax cost to try to keep this position running a little longer. I could’ve sold a May covered call to help buffer my early assignment risk, but I think (not sure, so double check if you are in this situation) that my holding period will actually start when I sold the naked put that was assigned. I did that in February, so in a few days it’ll be a long-term gain anyway.

My TLT short shares and the covered puts I sold on them for March expiration are looking good again. I’m thinking about closing the position before March to avoid paying another short interest payment. Once I close them, I’ll probably sell a new set of naked calls again and start all over. Ideally, I’ll be able to use a higher strike to give me more wiggle room when managing the position post-assignment, if that happens again.