Our fearless, intrepid investor usually writes (sells) covered calls on SPY on Mondays, expiry date on the Fridays of the same week. She was busy with personal issues yesterday, Monday, February 13, so she did not get around to doing that and will do so today.
First, is there a big difference between writing covered calls on a Tuesday instead of a Monday, expiry date Friday of the same week?
Well, the closer we get to the expiry date, the smaller the premium income available. But the inevitable market fluctuations often offset that difference, therefore, it is not a major concern.
The second question is why does she choose SPY instead another of the thousands of securities on which investors can write covered calls?
SPY is an exchange-traded fund (ETF) that tracks the S&P 500, which itself is a good representation of the American economy as a whole, the world’s strongest economy in the last 200 years. SPY is the best choice among the few ETFs tracking the S&P 500. It is the largest, meaning that orders are filled reliably and instantly. Further, it has the smallest bid/ask spread, which is an expense to investors, an expense they frequently ignore.
Individual stocks carry a great deal more risk than the American economy as a whole does. That is why we recommend against investing in individual stocks. We have previously stated that the most important thing to learn from our fearless, intrepid investor’s loss of $US10,990.00 in her “fun” portfolio over a year is not to write covered calls on individual securities. She bought Novavax (NVAX) to write covered calls on and as the stock declined, she lost much more than she received in premium income.
She also decided to write (sell) covered calls sufficiently out-of-the-money to earn about 1% per month or slightly more. That will significantly reduce the possibility of being assigned while yielding a decent return.