Maybe we should have joined the Fire Department because we really like using ladders and in this segment we discuss and examine the use of laddered covered calls as compared to regular covered calls, two strategies that can reduce cost basis and are allowed in IRA accounts. The numbers here should be of interest to all traders.
A covered call can be an effective method to reduce cost basis when holding a long equity. We can “ladder” the calls with various strikes and expiration cycles when we have more than one hundred shares of an underlying,
A graph comparing a regular covered call and a laddered covered call against a position of long 300 SPY (S&P 500 ETF) was displayed. A regular covered call consists of selling 3 SPY February calls against our long 300 shares of SPY. A laddered covered call consisted of selling 1 SPY February call, 1 SPY March call and one SPY April call (with staggered strikes) against our long 300 shares of SPY.
An example of selling the 30 delta laddered covered calls in SPY (trading at $205) was displayed. The example included the strikes, days to expiration (DTE), premium collected, new cost basis on the long SPY stock, max profit, max return on capital (ROC) and max ROC per day.
A study was conducted using the SPY from 2005 to present (1325 occurrences). We compared selling three of the SPY 30 delta calls with a 45 DTE and compared that to selling one SPY 30 delta call with a 45 DTE, one SPY 30 delta call with a 75 DTE call and one SPY 30 delta call with a 105 DTE call against our long 300 shares of SPY stock.
A table of the results comparing the standard covered call and the laddered covered call after 45 days into the trade was displayed. The table included the average P/L per trade, win ratio, largest loss and largest profit on both strategies. Another table listed the pros and cons between a standard covered call to a laddered covered call.
Watch this segment of “Strategies for Your IRA” with Tom Sosnoff and Tony Battista for the takeaways and the pros and cons of a regular covered call to a laddered covered call.
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