Covered Calls for Fun & Income

April 10, 2009

The Case for Current Month Calls

0409_greedisgood

The famous Mr. Gekko from the Movie “Wall Street” put it very bluntly: “Greed, for lack of a better term, is good”.

Is it?

You might want to read an article by Michael Lewis posted on this blog. Mr. Lewis is the author of Liar’s Poker published in 1989 that chronicles the greed and corruption on Wall Street and predicts its eventual collapse. Coincidentally, the movie Wall Street was release two years earlier – in 1987.

Where is all this leading and what does it have to do with Covered Calls?

When I first started writing Covered Calls, I would sell Calls several months out – as many as 6 in some cases. Why? I was attracted to the huge premium – greed. Look at the example below:

0409-caseforcurrentmonth_chain

You can see that the further out the expiration date is, the higher the premium. Seeing dollar signs, huh?

But wait! Take a closer look! Notice the monthly premium actually drops off the further out you go. Prove this by dividing the Bid price of the Call option by the number of days to expiration, as illustrated in the table below (then multiply by 100 for the total Premium/Day for each contract).

0409-caseforcurrentmonth_calcxls

Granted these numbers may be a bit skewed because April expiration is only 8 days away, but it’s quite possible that it makes for an even more powerful argument – since this example is OTM and all we are looking at is Time Value. So the April Call premium is falling at a much higher rate than the other months, as expressed as the theta in the table below.

0409-caseforcurrentmonth_analyticsxls

(The option’s theta is a measurement of the option’s time decay. The theta measures the rate at which options lose their value, specifically time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option’s value will decrease every day.)

Now I am not a mathematical wiz nor do I understand completely what I am seeing here, but the numbers speak for themselves. (I had them verified by an option professional.)

In conclusion this appears to support the strategy of only (whenever possible) writing Calls, initiating Buy-Writes and even writing Cash Secured Puts for the current month only.

I rest my case, your Honor.

Today is a Market Holiday. Enjoy your long Holiday weekend.

Thank you for visiting my blog. Please feel free to comment.

– Jeff

“We make a living by what we get; we make a life by what we give.” Sir Winston Churchill (1874 – 1965)

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2 Comments »

  1. Nice article. I agree with your conclusion regarding near-month 100%.

    Comment by Jeff — April 10, 2009 @ 10:06 AM

    • Thanks, Jeff
      What I sold also have done was compare the monthly and annualized gains between all the expiration dates. I think that would have been even more convincing.
      Jeff W

      Comment by Jeff — April 10, 2009 @ 12:45 PM


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