I logged into my account this morning to see my QQQ June $191 naked put was assigned. QQQ was trading at $190.14 when I sold this put option at the end of April. At the end of trading yesterday, QQQ finished at $176.07. I’m sitting on a paper loss right now, but at least I took in $443.32 from the naked put.
I didn’t wait long before selling a covered call on my newly owned QQQ shares. While QQQ was trading at $176.89, up roughly half a percent on the morning, I sold one QQQ August $187 naked put for $2.28 and received $227.32 after paying $0.83 in commission. I would love to have sold the call option closer to the money, but I’m trying to remain robotic in my trading approach this year.
My plan is to earn close to 5% annualized on my covered calls if they aren’t assigned. The idea is that the market will fluctuate as it will and by selling options further out of the money, I have plenty of upside for the swings while producing alpha (index beating returns) using options. I want to reduce my risk with the option premiums, but essentially track the market as a whole.
This new August covered call will earn 7.0% if assigned. That’s 31.93% annualized. If it isn’t assigned and QQQ finishes at the same price as when I sold the contract, I’ll earn 1.28%, 5.86% annualized. The premium gives me an extra 1.22% of downside protection. That cost reduction isn’t much, but one side has to give when choosing strikes and I chose the risk reduction side as my loser with the upside potential being the winner.
If assigned, I’ll finish the series of trades with a realized gain of $270.64. Clearly, that “reward” is small, but considering the drop QQQ after I sold my initial put, I won’t be upset with it. Instead, I’ll be happy to see my account balance higher than it is now.