As we come closer to May and earning season starts making the markets gyrate we are going to hear the calls to “Sell in May & Go Away” get louder and louder.
Be what if we need or want to stay fully invested in the markets, what do we do?
The simple answer is to buy the S&P 500 index (Ticker: SPY) and sell a call against the position.
For a more detailed explanation of the covered call strategy see our article Covered Call Option Strategy explained.
The S&P 500 currently stands at 1563, the SPY ETF is at $156. The S&P 500 is up over 10% year to date and up over 13% in the past 12 month.
There are two approach’s we can take to this:
- Buy the SPY and sell out of the money calls against it every month. Meaning sell May expiration calls now and when they expire sell the June calls and so on until Labor day.
- Buy the SPY and sell the September calls against in now and wait the four and a half months until expiration.
Taking the second approach of selling September $157 Calls at $5.00 would yield us a 3% return if the SPY stays where it is and the calls expire worthless. This also gives us 3% padding if the S&P drops 3% during this time.
Another option would be to sell the September $160 calls at $3.60 which would increase the potential return to 4% at option expiration the SPY is over $160, but it does not give us the same downside protection that the $157 calls give with the $5.00 premium they have.
Remember, you do not need to wait until the option expires to lock in profits. If the S&P falls and the option you sold is now worthless, you can try picking market tops and bottoms by buying back the call you sold and wait for the market to swing higher before you sell the same call again.
Just some thoughts and a different twist to those who decide buy puts for protection or those who liquidate everything going into May and the summer months.