Sold QQQ Covered Call

On Friday, I thought QQQ’s resistance at its 50-day moving average might last more than one afternoon, so I entered a limit order to sell a covered call. Not being overly confident in that line of resistance, I used a strike fairly far out of the money. While QQQ was trading at $369.78, on its road to over $372.60 by close, I sold one QQQ December $385 covered call for $3.70 and received $369.32 after paying $0.68 in commission.

I chose the $385 strike because it is just above the highs QQQ bounced against the first week of September. I could see the ETF pushing back to that previous high, and maybe a touch higher, before taking another breather. If I’m wrong, I’ll still earn 5.11%, 29.88% annualized, from the share price when I made the trade. That would be a gain of $1,891.32 more than I had when I made the trade. If my option is not exercised and it expires worthless, I’ll make 1%, 5.83% annualized, on the option premium alone.

QQQ will have to break above $388.69 for me to take a loss on the option if I want to close it before expiration. I probably would roll it for a loss if it’s in that range the week before expiration because I would have an unrealized gain of more than $16,000 on the shares by then and I have no desire to take that gain in the final month of the year. I’d rather roll it into January at the earliest and avoid paying taxes on the gains for one more year. Luckily, it will be a long-term gain whenever I do sell the shares, but that doesn’t make me want to pay a few thousand in taxes for an investment I’m happy to hold for the foreseeable future.