It’s a race – FAS, FAZ covered calls

With the price-decay nature of FAS and FAZ, being long both is a double whammy. The expectation that one will blast off and make a winner out of the pair is becoming pure fantasy. But the volatility in the options enables one to write covered calls, which deteriorate at a faster rate than the underlying is decaying. At least for now.

The trade is to sell a decaying asset (out-of-the-money calls) against a decaying asset (long stock in triple-leveraged ETFs). Because these ETFs are leveraged like they are, implied volatility in the 200% range is about normal. That equates to a lot of premium for covered call writers. Now the question is which asset is decaying faster – the stock or the OTM calls.

I’m betting the OTM calls. And that’s why I’m still owner of these pathetic investment vehicles. I look at it as stock rental, rather than ownership. I could just write naked calls, but what if I’m wrong about neither of these ever being able to blast off? Naked calls are scarier than naked puts because your risk is truly unlimited, whereas the naked put is limited to zero.

I got $1.71 credit for the MAY cycle, and paid a nickel apiece to take off the risk. So my MAY credits netted $1.61 per 200 shares (100 shares FAS, 100 shares FAZ). I sold the JUN 10 calls for $1.70 total and expect a rerun of MAY. If I’m right, my cost basis for the long FAS, long FAZ pair will continue to go lower. Hopefully my cost basis goes lower at a faster rate than the inherent price decay.

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2 Responses to “It’s a race – FAS, FAZ covered calls”

  1. Anonymous Says:

    FAS / FAZ are very volatile… Should volatility significantly increase in the next 30 days, so should time value of these options, thus lowering your “rental” – is that correct?

  2. Milk Trader Says:

    It is correct to state that volatility is synthetic time. In fact, that is a salient point that is oftentimes missed. Also, anytime you’re short options (OTM) you are short vega, meaning you benefit from a decrease in volatility.

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