QQQQ Options Above Water and Generating Income in Down Market - Update

QQQQ along with the overall market declined sharply over the past week and amidst high volatility. Despite QQQQ falling 8.3% since we initiated our position on April 6, our optios position has shown a slight gain of $270 and has generated $790 in cash. This week, we're going to take advantage of the drop in QQQQ and rise in volatility to reset the position. First, let's start with a recap of the initial position we took in early April:

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 44.74

Difference $-4.05

Call

Sold 0.87

Current 0.08

Difference $0.79

Put

Bought 5.28

Current 8.81

Difference $3.53

The overall difference is $.27. That's down from the position worth of $1,130 last week, but still pretty good considering the drop in QQQQ. This week, I also decided to buy back the June 2010 call at $.08 so I realized a cash gain of $.79 per contract or $790. While QQQQ has dropped by $4.05 the sale of the call and the put I purchased have more than made up for the difference. Volatility has helped, increasing the value of the put.

Now, I want to take advantage of that volatility and sell more call options. Because there's high volatility I don't want to sell options too close to the strike price. I also think we may see a bit of a settling down and rebound in a month or so. So, I'm going to sell Sept 47's at $2.23 per contract. I'm betting that the following will happen:

1. QQQ won't end up much higher than 47 or 48 during that timeperiod.

2. Volatility will come down, eroding the value of the option.

3. Time decay will contiue to chip away at the value.

If all goes well, I'll generate $1-2,000 in cash. If QQQQ continues to drop, the Put will protect me and I'll take the cash from the call and continue to sell more calls.

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

Generating Income with QQQQ Options - May 13, 2010 Update