Generating Income with QQQQ Options - May 13, 2010 Update

This week, the QQQQ position I have taken has bounced back nicely and is now up $1,130 even though QQQQ is actually down a bit from where I initially purchased it. But even better, the call I sold is now eroding quickly and that is where the income comes from. My previous article describes the position I took in detail. But to summarize, I did the following:

Bought 1,000 of QQQQ at the current price of $48.79.

Sold 10 contracts of June QQQQ calls at a strike of 50 for $.87.

Purchased 10 contracts of Dec 2011 Puts at $5.28 at a strike of 48.

I checked on the prices today and here's how the numbers look:

Bought 48.79

Current 48.62

Difference $-.17

Call

Sold 0.87

Current 0.65

Difference $0.22

Put

Bought 5.28

Current 6.36

Difference $1.08

The overall difference is $1.13. In total, the position is now up $1,130 even though the base security is lower than what I purchased it for. There are two reasons for this: 1) time decay has eroded the value of the call I sold so that even though QQQQ is at virtually the same price, the call has lost $.22 of it's value. I make money if the value continues to erode because I've already sold it at $.87. The difference between what I sold it for and it's value when it expires in Juneis what I get to keep.

The second reason why the position is up nicely is because the put I purchased has increased in value. The put is far enough in the future that time decay does not impact it as much. But the market's volatility seems to have increased its value nicely. If volatility comes down, as it might, then the put will lose some value.

My goal is not to make money from the put or the actual equity. If I do, fine. But the goal is to pocket income from selling calls. So, even if the position goes negative at different periods of time, I look at that as a temporary situation, like a bond losing value because interest rates have increased. The bond in that case is still producing income and bond values change all the time.

Still, it's better to have a position in the red than in the black.

Previous Updates

Generating Income with QQQQ Covered Calls and Puts - Initial Post Describing the Position

Generating Income with QQQQ Options - Update - April 27 Position Update