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Like many beginners, when I started trading options, I sold covered calls, then cash secured puts. Then buying calls and puts. I remember in those days, I often said to myself, “covered call writing is such a wonderful strategy because at the end of every month the calls expire worthless and I’d sell another call and collect the premium. I can do this month after month!”

But after using this strategy for a while, I have to say that this is not as “safe” of a strategy as some people believe. Yes, you sell your call; keep your premium no matter what happens to the stock. But the fact is you can lose a lot from your declining stock–much more than the premium can ever give you. Yes, in a declining stock you can keep selling lower and lower strike calls, but the loss from the stock would still be greater than the premium collected, or break-even at best. For example,

–bought SPY at 120 and sold the 119 call
–at expiration SPY closed at 114. Premium kept, long stock.
–sold the 112 call trying to collect higher premium in a declining stock
–at expiration SPY closed at 108. Premium kept, long stock.
–sold the 106 call trying to collect higher premium in a declining stock
–suddenly SPY went up and at expiration closed at 115
–assigned at 106

Overall, SPY was bought at 120 and assigned at 106, a loss of $14. Yes, I collected premium along the way, all ITM calls:
— sold 119 call when stock at 120 then,
–sold 112 call when stock at 114 then,
–sold 106 call when stock at 108.

Sorry, I couldn’t find the exact amount of the premium collected. But, I do not think it’s more than the $14 loss from the declining stock. Perhaps at best, it was a break-even. That is, I collected $14 in premium but then lost all of it from assignment at the end. (This message is not: assignment is bad.)

Well, even if it was a break-even, it still wasn’t a good experience: I put in all the time, effort and anticipation that I am using a very “safe” & “good” strategy, but at the end, it was just a break-even or a loss.

So, I just wanted to share with you about the experience that CCW is not without risk, especially when the stock plummets and suddenly shoots up. And the fact is, it is not uncommon nowadays to see a volatile market, so stock prices behaving in an unpredictable & erratic manner is not at all unusual.


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Trading SPX Shares

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Question on the SPX. Can one buy the SPX outright in place of buying SPY
ETF? Not the options but the SPX itself. If I wanted to allocate
$20,000 into the S&P 500 in a taxable account I could just buy 20
SPX contracts (assuming the SPX was at 1,000). If so, would this qualify
for that 60/40 tax treatment if sold at a gain even if the options aren't



Hi Ann,

You cannot buy 'SPX' in the sense that you can buy shares.

The best you can do is buy an index fund that comes very close to mimicking the performance of SPX.  One such a fund is the Vanguard S&P 500.  You simply buy $20,000 worth of shares.  However, this is a (low fee) mutual fund, and not what you truly want to own.  It's nearly what you want, but so is SPY.

Yes, if you buy SPX calls, you get 60/40 tax treatment. 

But please (PLEASE) remember that when you buy calls you are not 'investing' in the index in the typical meaning of the word.  $20,000 worth of calls may expire worthless while SPX remains unchanged.  You apparently want to own shares – and that is VERY different from owning call options.  

If you can meet the margin requirement, and if your broker allows the trade, you can buy calls and sell puts.  The puts and calls must have the same strike price and expiration date.  That is exactly equivalent to owning shares, except they you do not collect any dividends.

The fact that you may be ale do this does not suggest it is a good idea.  You can easily lose the entire investment.

Let's look at ATM (at the money) options.  If you buy 2 SPX Oct 1070 calls and sell 2 SPC Oct 1070 puts, your would own a position that behaves the same as owning 200 shares, or $21,400 worth of a portfolio that is based on the S&P 500 Index.  This trade would cost a small cash debit (but a much larger margin requirement). 

At expiration, these cash-settled options would be worth the closing value of the index, and you would have a profit or loss based on owning 200 'shares' of SPX with a purchase price of $1,070 per share.

If SPX > 1,070, then you get the intrinsic value for your calls – in cash.  With SPX = 1100, the calls are in the money by 30 points each, and your account gets $6,000 in cash.  That's the profit you would have earned if you could buy 200 shares at $1,070 and sell them at $1,100.

If SPX < 1,070, your calls have no value, and you would have to pay cash because you are short the puts.  A closing price of 1020 means you would owe $10,000, and the value of your investment would be the remaining $10,000. 

When you own shares and it declines by 50 points, you lose 50 X $100 per point, per 100 shares. That's $5,000 per 100 shares, or $10,000.

Note:  If SPX declines by 100 points, you lose your entire investment.  Not only that, but as the value declined, you would get margin calls and possibly be forced to liquidate at an inconvenient time.

You did not state why you want to buy SPX 'shares' – but if it is to save commissions on buying SPY shares, that's not a good enough reason.


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