Eroding options on eroding assets: FAS, FAZ and their calls

Whew, that was quite a ride on the FAS/FAZ train this month. My premium collecting strategy has dodged the bullets of having my lovlies called away from me. I sold calls at the 10 strike on both FAS and FAZ last month, and today was able to buy back my lonely FAS JUN 10 call for a nickel. I bought back the FAZ JUN 10 call for a nickel, I don’t remember, maybe two weeks ago.

But this fun and games also has a downside. I am the owner of perpetually eroding assets, namely long the triple-leveraged ETFs. I calculated what my effective stock decay has been since I bought them a mere two months ago, and compared it to the option decay that I benefited from. View the horror on the chart.

These ETFs are eroding faster than 30 day-out freekin call options! And they’re OTM options to boot.

This next option cycle is show time as I’m no longer selling the 10 calls in both underlyings. In fact, I’d like to get off this roller coaster and have dutifully sold ATM calls in both. That means I sold the JUL 9 call in FAS and the JUL 6 call in FAZ. One of them will have to get called away next month.

Credit received is another $1.82. When one of these gets called away next month, I will be the owner of either FAS at the effective price of $7.06 a share or FAZ at the effective price of $4.06. The math is roughly correct.

Let the games continue.

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4 Responses to “Eroding options on eroding assets: FAS, FAZ and their calls”

  1. Anonymous Says:

    That has to be one of the dumbest strategies I have seen anyone come up.

  2. Milktrader Says:

    Dumb like a fox.

  3. Kenny Yu Says:

    Milktrader, if you know you are losing the race of erodsion, why do you continue the game?

  4. Milk Trader Says:

    The idea is that the short call premium will eventually catch up and exceed the price decay inherent in the ETF. This is gonna be the last cycle of the experiment though, because they're doing a reverse split that will make this trade truly a losing proposition.

    But if you sold naked OTM calls, now you may have something …

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