I’m continuing to pound the table on the idea of selling options to generate income with volatility at its current level. The Cboe Volatility Index (VIX) continues to hover around 30, which is creating very interesting opportunities in options.
Most everyone owns stocks. Therefore, the risk we all share is that the equity market could move lower. This year has been a wake-up call to many in terms of how quickly things can go from calm to panicky, and a lot of folks were caught off guard with stocks’ most recent move lower.
Because most of us are rooting for the market to go higher, let’s make a trade that will net you a profit even if the market stays sideways or moves lower: selling a call spread on the S&P 500 index.
I like call spreads because they limit the amount you can lose. If you simply sold a call, your loss is theoretically unlimited.
I’m looking at a call spread where the call strike is at least 5% above the current market level. With S&P currently trading at 3975, the trade I’d put on today is:
Sell June17 4175/4235 call spread @ $12.15.
If I sell one call spread (100 share equivalent), I would collect $1,215 up front. I will realize all of this as profit if the S&P settles below 4175 at the 6/17/22 expiration.
The risk is $4,785 if the market rallies through the 4235 strike (the long call to where you are stopped out—$60 width of the call spread minus the $12.15 collected at the outset).
While the risk/reward is skewed to the risk, it would take a 6.6% move in four weeks. If that occurred, I’d either roll this call spread higher or be happy to take profits on my portfolio at that point and sell out some gains from this level.
I think all of us would be thrilled if the S&P moves to 4235 in four weeks. But let’s make some money on a trade anyway, just in case it doesn’t.