Back in the old days before mutual funds and ETFs and when trading costs were high, and logistics were prohibitive, Best Six Months Switching Strategy investors and traders were known to implement a covered call strategy against their stock positions during the Worst Six Months (WSM) period May-October. A covered call is a common strategy used by both traders and investors who are bullish longer term but expect sideways trading in the near future.
Since our Best Six Months (BSM) MACD Seasonal Sell Signal triggered on April 2 the market sold off in April but has rebounded here in early May back up near the highs, underscoring our expectations for a sideways, rangebound market over the WSM. It remains to be seen if the market will make significant new highs here, but we suspect the current rally is a bit of an overreaction to some recent tepid economic and labor market data that has trader’s hopes up again that the Fed is going to cut rates soon and liberally.
In our view the Fed is in no rush to cut rates. There is no crisis at hand in the market. Softer economic readings have only begun to creep in, and inflation data is still stubbornly high. So, for readers that are experienced options traders, agree with our thesis and are long DJIA and S&P 500 stock or ETF positions a covered call strategy could be an option to generate some income during the WSM and/or lower your cost basis on your under lying positions.
For this example, we are going to assume as
Almanac Investors you established DJIA and S&P 500 positions as per our strategy back in October and are up substantially on those positions. If you are considering this type of trade please do your homework. The folks at TastyTrade have a helpful refresher
here at their TastyLive site. Here’s the full link you can copy and paste:
https://www.tastylive.com/concepts-strategies/covered-call.
A covered call combines a long stock or ETF position with a short call position. You own the underlying stock or ETF and sell or “write” an At-the-Money (ATM) or Out-of-the-Money (OTM) call against that position. If the stock or ETF is at or below the strike price of the call at expiration the option expires worthless, and you keep the premium. If the underlying security is above the strike price you can let the stock or ETF get called away and take your profit on the underlying position or buy the call back if the premium is less than you sold it for and roll another covered call for the next expiration if you feel the outlook remains the same.
Using the SPDR DJIA (DIA) and SPDR S&P 500 (SPY) ETFs as examples, consider looking at the June 21, 2024 monthly expiration contracts. OTM strike prices at or above the recent closing all-time-highs with a high open interest and trading volume are likely the best choices. Using today’s pricing the 395, 400 and 405 strikes on the June 21 calls for DIA and the 525 and 530 strikes on the June 21 calls for SPY are worth considering.
Remember option pricing is fluid and this strategy is only for seasoned and sophisticated traders. If you are not familiar with it perhaps this year you just watch it or use one of the paper trading options on many trading platforms. Otherwise, heed our cautious recommendations and sit tight and follow our standard portfolio recommendations as you see fit.