My Foray Into Writing Shorter-Duration Covered Calls


One of my income-generating strategies in retirement is writing Puts against stocks and ETFs that either had high volatility or were on my buy list. This resulted in me gaining small positions in Walgreens Boots Alliance-twice (WBA), Wesco (WCC), and Delta Air Lines (DAL).

Being comfortable writing monthly options that expire on the third Friday of the month, my original strategy was using those. In mid-summer, I started mostly writing shorter-dated options using the weekly options on DAL and WBA. WCC doesn’t trade weekly options. The time periods used with weekly options ranged from 2 to 18 days.

Before going into my trading activity, a reminder that option trading is not for every investor. Options have risks and rewards that differ from equity and bond trading. I will cover some of those next, but first, those new to option writing should pause and read the following blog post and article:

Risks and Rewards of Writing Covered Calls

The biggest Covered Call risk is being called, losing any price gain higher than the chosen strike price. You have control over this risk. A second risk is the stock drops and you want to sell. You need to close out your option position first or you open up a new risk of having an uncovered Call. The added risk is some investors will wait until their call expires, in which time, the price could fall further. Another risk, also mostly controlled by you, is getting called early and missing out on a dividend payment. This risk can be reduced by not writing a Call option that expires within the two weeks after the ex-date.

The main reward is the premiums you earn. For this reason, some traders use the buy-write option strategy to earn high short-term ROIs. Due to taxes, this is best done in tax-sheltered accounts like IRAs.

Choosing between Shorter- or Longer-Dated options

Call writers have a wide range of how long they want to write an option for. Some stocks/ETFs have options that expire every Friday to LEAPS that are currently available through 2022. Your potential ROI will help decide which to use, but there are other factors to consider. Here are a few:

Time Value

An option’s premium has two components: time value and intrinsic value. Covered writers only profit from capturing time value. If a XYZ $30 Call sells for $2.00 when XYZ is at $30.75, then $.75 is intrinsic value (XYZ price less strike price) and $1.25 is time value. Go out further and the $30 Call will be more than $2.00, thus more time value. How much more is dependent on two variables: time to expiration and the stock’s volatility. Ignoring dividends, the writer’s maximum profit is the option’s time value.

One disadvantage of trading a series of short-dated options versus one long-dated option is time, specifically lost time. An investor could buy 4-5 weekly options or 1 monthly option. While both cover 28-35 days, because options expire Friday and cannot be replaced safely until Monday, weekly options have you out-of-market 38% of the time. I say safely as, if allowed by your broker, you could write the new option as the market is about to close Friday. My IRA rules don’t allow that. While extremely rare, after-market news could move an OTM option to an ITM one, as options don’t expire when the market closes but later. So, while trading stops at market close, an option can be exercised as late as 5:30 p.m.

(Source: Options Manual)

A major reason investors like short-dated options is most of the time value in the premium evaporates in the last two weeks, as can be seen in the above chart. This is a definite advantage they have over longer-dated options. This rate of decline is called Theta, and any good options trading platform will show this.


Time can also effect risk in your choices of strike prices. Longer-dated options might have less choices than closer-expiring ones. That could mean writing an option with less ROI than desired.

If your trading strategy is rolling your option position each week, you need to trade quickly, as the time value is shrinking rapidly. Each Monday, you need to decide whether to cover as the market opens or wait to see if the stock bounces higher fast enough to offset the time decay. You learn to live with making the wrong choice, as this example of mine shows.

ChartData by YCharts

The above chart shows DAL’s movement the day I wanted to re-cover my shares. Overnight news had the president allowing more plasma use to fight COVID-19, and that airlines reported business travel wasn’t improving as the leisure travel season was coming to an end. The pre-market trading showed a possible $.60 uptick in DAL’s price. I calculated where the options might open and placed my trade. As the price started giving up some of the pre-market gain, I adjusted my bid and my trade triggered around 10 a.m., when the market started up again. Then, the price jumped and the option nearly tripled in price. Oh well. On the flip side, I covered my WBA shares near the options’ highs for the day.

If your writing options where the premium is below $3, with exceptions, bids must be placed in nickles, above $3, in dime increments. This becomes more critical when trying to close out a winning position early and you want to bid one cent! There are a growing number of options that allow bids to the penny.

Trading shorter-dated options has the benefit of allowing you to constantly adjust the strike price used as the stock price moves after each expiration. Another benefit is if the price jumps, you are not owning options with little time value left in them for an extended period. Trading longer-dated options has some advantages too: less trading required, larger time value captured, and not needing to cover during short periods of price weakness. That’s the trade-offs investors have to make. Understanding volatility is important in helping with that decision.


ChartData by YCharts

This variable drives the option premium’s time value. More volatility equates to higher time values for option writers. Back in the spring, using longer-dated options would have allowed writers to capture that spike for a longer time. The highest ROIs on my August options were the ones written in April. The pending election and the unknowns about vaccinating against COVID-19 could keep VIX above pre-virus levels until 2021. How an investor evaluates this variable should influence which options to write.

Trading History

I will now cover all the option trades I have made on the three stocks mentioned. As of this writing, I have been called out of WCC.

ChartData by YCharts

Wesco is a B2B company in that it supplies parts and services to other companies. That explains the large price drop during the panic.

I acquired 300 shares in March when my April Puts were exercised as the stock dropped from above $50 to below $15. When the recovery stalled in late April, I wrote 2 May $30 for $.35. Part of my strategy was to not cover 100% of my position in case of a strong rally. This set expired OTM. The following Monday, I wrote two Jun $35 Call for $.49. This set was called as WCC briefly traded above $35. When WCC started to drop again in July, I covered the remaining 100 shares with an AUG $45 after takeover rumors pushed it above $42. Those shares were called as WCC closed at $45.63 at expiration, but I still made $1.01 on the option, since it was sold at $1.64.

WCC is the kind of stock that does not make for good option writing. Besides no weekly options, the monthly ones have both large bid/ask spreads and low volume. That was why I chose to include it in this article whose main focus was using weekly options. I could have simulated using weekly options by waiting until closer to the expiration dates, but that would have cost time value in the premiums. I was quite okay letting WCC go.

My adventure with Delta Air Lines started in January when I wrote 2 APR $50 Puts, which, due to COVID-19, were exercised against me, as DAL was under $26 at the time. I managed to write six sets of Call options before having the shares called away off the last contract. Good news once again pushed DAL stock above $30.

I netted $2.95 per DAL share over the 140 days I owned the stock, which works out to just under 30% ROI. Another way to view it is I sold at $32.95 when the market price was $31.77, still way below my cost. If I hadn’t started using the weekly options, I would had two less trades and the September contract wouldn’t expire until the 18th. I’d say I did great in picking two strike prices, okay on three, and very bad on one. The advantage of trading short-dated options is you get to trade more.

I do have 5 $10 SEP Puts open, which, unless something really bad happens, will net me almost as much as all the Calls written.

The last one I will review is Walgreens Boots Alliance, which I got in two Puts to me, first in January (300 shares) and the second in May (200 shares). Going to weekly options had its pluses and minuses. On the positive side, I had more ability of not having them all expire on the same Friday. As occurred last week, the price dropped as the need to re-cover WBA occurred, a heightened risk of writing weekly options. This is what I was looking at, as I write this with the need to cover all 500 shares.


I chose to skip the 9/18 options for two reasons: I have plenty of Puts expiring that day, and time decay appears best going out 2-3 weeks. As you can see in my trade history, I sold 3 $37 OCT 2nd Calls when WBA was at $35.10 this morning. Over the weekend, I decided to switch to CVS Health Corp. (CVS) as a better play in this sector, so writing a tighter strike price was chosen. I will use the OCT 9 Calls for the other 200 shares. I have an order in on the $38.50 Calls.

Besides the Call options, three times I have written more Puts against WBA; those are in bold; one of which is still open. I don’t use weekly options when writing Puts because I want to capture more long-term time decay.

My option writing has generated close to $1600, or 30% on my original cost, in nine months. Again, ROIs are annualized for easy comparison, with some of the highest on options owned less than five days. Looking at dollars earned is a better metric.

Portfolio Strategy

While I write covered calls, seldom do I against positions I want to hold long term, regardless of any premiums I could potentially earn. I have developed an Excel tool to help evaluate potential ROIs for both my Covered Call or Put writing strategies. Fidelity provides a probability calculator that gives the odds of being called for any date and price. I find both are critical for making better option writing decisions.

While I measure the annualized ROI on every trade, in some sense they are meaningless, more so the shorter duration the option is written for. Why? It’s near-impossible to duplicate any trade over 52 weeks. Concentrate on the money made, not a theoretical ROI. As another contributor’s recent article articulated, view premiums as a second source of dividends, and thus yield enhancement

History shows that time values collapse drastically during the final two weeks, and thus, when trading weekly options, I focus on skipping every other week. In other words, writing options with 11 days left until expiration to maximize capturing this deterioration.

Knowing the dividend ex-dates is critical, as you don’t want your option expiring just after an ex-date, as that increases the chance of being called. Option traders know these dates, and I have found the premium’s bid/ask values incorporates that information as a date gets close.

While this article focused on strategies for using Covered Calls, my option strategy of choice for income generation is writing Puts.

If you appreciate articles of this nature, please mark it “liked” and click the “Follow” button above to be notified of my next submission. Thanks for reading.

Disclosure: I am/we are long WBA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Also long OCT 2nd and OCT 9th Calls and short OCT 16th Put on WBA.

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