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Cross Product Covered Calls

Market Measures

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A covered call is comprised of long 100 shares of stock and a short out of the money call option. If traders don’t want to forfeit their upside potential, can they construct a covered call by selling calls on a highly correlated index?

The Study:
  • Portfolio of 100 Shares Five Underlyings:
  • Compared Two Variants of Covered Calls
    • Short 30 Delta Calls on Each Individual Stock
    • Short 3 30 Delta Calls on SPY
  • April 2018 to Present
  • 45 DTE Held to Expiration

Compared to just the portfolio of long stock, the covered call portfolio has very similar performance with 10% less volatility. Almost identical results are obtained when the covered call is initiated on SPY! Using a highly correlated index, traders can consider selling calls on the index to simulate a covered call without forfeiting their upside potential.

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