Update on SDS Buy-Write Strategy Covered Calls

Overview

On 4/12/2012, I initiated a buy-write strategy covered calls with SDS, ProShares UltraShort S&P500. The ETF was acquired at a cost of $10 per share. The covered call contract was written at a cost of $0.55 per contract. The stock’s cost basis was $9.45.

SDS buy-write strategy covered calls entry and exit dates

What Happened

It wasn’t a good setup. On 4/12/2021, the SP 500 closed at 4127. It gained 105 points and ended at 4232 on 5/7/2021, representing a 2.5 percent increase from 4/12/2021. My SDS stake dropped to as low as $9.41 per share on 5/7/2021. The breakeven point was calculated at $9.45. The $0.55 premium earned should provide about 2.75 percent protection against a drop in the $SPX.  SDS provides $SPX with 2x daily short leverage. As a result, half of the 5.5 percent, $0.55 (premium) / $10 (stock purchase price) = 5.5%, equates to 2.75%. That’s exactly what it did.

Conclusion

On 5/10/2021, the SP 500 reversed and started trading downward. I chose to take a little profit just to pay the options costs and exit this trade for three reasons:

  • SP 500 might be adequately supported by 4128 and 4000.
  • The entry position was precisely in the SP 500’s support zone, which was bad in my perspective.
  • The funds have been stuck in this position for a month.

The cost basis was calculated at $9.45. I put in a limit order of $9.42 to close it out. As a result, I earned a 3-cent profit on this trade, which was more than enough to pay the options commissions.

Lesson Learned

I should have stayed with the technical analysis of the Renko chart. I was attempting to forecast and time the market, but I made a huge error. The SP 500 was in record territory on 4/12/2021, according to the daily Renko chart below. There was no evidence of a trend reversal on the chart. Everything points to a very strong upward trend. Looking at the RSI, I thought the SP 500 should be corrected and not rise any more. Wrong. Timing the market is a bad idea. Attempting to predict a peak is equally unwise. Fortunately, I was able to close the position at a tiny profit. I’d consider myself really lucky.

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