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Weekly Versus Monthly Covered Calls

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by Gavin in Blog
January 22, 2022 5 comments
weekly vs monthly covered calls

Today, we will evaluate which is better – weekly vs monthly covered calls. This is a heavily debated topic.

We see some covered call specialists consistently use monthly calls, while others claim that weekly calls are better.

We find mostly opinions, rational, and personal preferences out there on the Internet but find little empirical evidence one way or the other.

This article will perform an experiment using historical options data to see if one is better.

Along the way, we will also bust some myths about covered calls.

Contents

Arguments For And Against

The argument for monthly covered calls is that you get a larger premium with less monitoring, fewer transactions, less work, and fewer commission costs.

When expiration is farther away, there is less price risk and lower gamma risk.

Trying to sell premium in a short time frame is a risky business.

You have a better reward to risk with monthly calls.

By using monthly expiration cycles, you also have tighter bid/ask spreads and lose less on slippage.

The counter-arguments for weekly covered calls is that the premium you received for the month is less than the four or five weekly premiums added together.

Hence, you can make money faster with shorter-term calls.

Because a new call is placed at a similar delta every week, we respond more quickly to the stock’s movements.

You get a larger theta decay selling short-term calls.

Okay, nice conjectures by both sides.

So far, they are only conjectures.

Let’s get on with the experiment.

The Experiment

We will use OptionNet Explorer to perform hypothetical trades buying stock and selling options at market open.

We will hold the trade to expiration at market close.

If the call expires worthless, we sell another call the next trading day at market open (usually Monday).

If the stock is called away, we buy 100 shares at the market open the next trading day and sell another call.

For this experiment, we are selling calls around the 30 delta. We will run the experiment for about six months before comparing the profit and loss (P&L).

Covered Call Experiment On An Extremely Bullish Trend

We will run the first experiment on the stock American Express (AXP) from January 1 to July 31 of 2021. Here is the price chart.

First, we sell monthly covered calls which gave us a final P&L of $4298…

Then we sell weekly covered calls which gave us a final P&L of $4414:

While the weekly covered calls came out ahead by a very small amount, look at the number of transactions and amount of work involved compared to the monthly covered calls.

I was starting to get blurry eyes just from running this experiment.

Our initial investment of 100 shares of AXP on January 4, 2021, is $12151.

A profit and loss of $4298 on monthly covered calls and $4414 on weekly covered calls is the difference between a profit of 35.4 percent and a profit of 36.3 percent.

With only one percent difference, one can argue that the monthly and weekly are not statistically different.

In this case of a very bullish stock, the covered calls under-perform the buy-and-hold investor who would have purchased AXP at $121.51 on January 4 and sold it at $171.75 on August 2.

AXP is a stock that went up 41% in 6 months, which is not common.

We picked this extreme example to see how the covered calls perform in the extreme bullish trend.

For the next experiment, we will see how the covered calls perform in an extreme market sell-off.

Covered Call Experiment On An Extreme Market Sell-off

The chart on Boeing (BA) from October 1, 2019, to March 27, 2020, looks like this:

A buy-and-hold investor who bought at $382.43 and sold at $162.00 during that timeframe would have lost 57.6% of the initial investment or $22,043.

An investor selling monthly and weekly covered calls would have lost 58.7% and 60.0%, respectively.

Again,  the difference between the monthly covered calls and the weekly covered calls is about 1% — hardly much of a difference at all.

This time the monthly covered calls came out a tad ahead.

A covered call is supposed to give the investor some downside protection.

Yes, but very little.

When a stock decides to go down in a big way, the premium collected from selling calls is not going to help too much.

Selling at the 30-delta is not going to give you enough downside protection in an event like this one.

Selling closer to the money at a higher delta in a bear market may give better downside protection.

Moderate Market

After seeing both extremes, let’s look at Cola-Cola’s more typical price chart from May 1 to October 26 of 2020.

A buy-and-hold investor buying at $45.35 and selling at $50.12 would have made $477 on 100 shares.

The monthly covered calls on the same period would have made $502.50

The weekly covered calls would have made only $358.50.

Busting Some Myths About Covered Calls

True or false? “Returns will be enhanced by selling covered calls.”

Answer: Partially true.

This assumes that you have positive returns and that the stock price goes up.

Even then, it is only sometimes true (as in the monthly calls on KO).

For a very bullish stock (as in the case of AXP), the covered calls diminish the returns instead of enhancing them.

The covered call caps the upside.

Myth: “You can not lose money selling covered calls.”

This affirmation is false.

We’ve just seen how to lose more than $22,000 on covered calls positions.

The covered call is considered an unlimited risk strategy.

The position can take on large losses because it contains at least 100 shares of stock.

There is no limit on the amount of loss until the stock price hits zero.

If you have read this statement somewhere on the Internet, what they mean is that “You can not lose more money selling covered calls than if you were holding the stock by itself.”

This statement is true for a single trade viewed in isolation.

For anyone particular losing trade, a premium indeed collected offsets a small portion of the loss.

However, when you string a series of covered calls together one after another, it is possible to lose more money in aggregate than an investor holding only shares of stock.

We have just seen this in the case of BA.

Both the weekly and monthly covered call strategy lost more money than an investor holding the stock itself.

In a sharp sell-off, there can also be sharp rebound rallies.

The stock investor can recoup more gains during those rallies than a covered call writer because covered calls cap the upside.

So to me, that statement is misleading unless you understand the nuances behind it.

Summary

We’ve seen cases where the monthly covered calls performed better, and in other instances, the weekly covered calls performed better.

And there are cases where neither performed better than holding stock alone.

It depends entirely on what the market decides to do and on the delta the calls were sold when the market did what it did.

One is not better than another, at least not all the time.

One thing is for sure, the weeklies require much more work and can incur more commission costs.

In our experiment, we didn’t take that into account.

The results between the two are so close that it probably doesn’t matter too much between weekly and monthly in the big scheme of things.

It comes down to personal preference.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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5 Comments
  1. Pablo S says:

    Very interesting post. I think that happens when go to covered calls for years. In this case, the profit is “garantized” if stock up of initial price. Other interesting conclussion of this experiment: not sell stock when price down, because not really exist downside protection

  2. Jai Kasthuri says:

    Gavin, Thanks for the excellent article. One thing about the terminology in this article that seems confusing is what you define as ‘Monthly’ and ‘Weekly’. Generally we think of Monthly to mean the options with 3rd Friday expiration compared to Weeklies that expire on all the other Fridays. Monthly expirations tend to have more volume and tighter spreads than Weekly expirations. But I think in this article you simply mean Monthly = 30 DTE and Weekly = 7 DTE. Is that correct?

    1. Gavin says:

      For the purpose of this article yes, that’s what we mean. But you are right, we can still have “weekly” options with 14, 21 dte etc. And yes, those will have lower liqudity.

  3. Gert Lamprecht says:

    Hi Gavin,
    In the example above, if the covered call trader keeps replacing the 100 shares when they are called away, then surely he participates in the capital growth to a similar extent as the shares only trader in a bull market. The call premium then comes on top of these capital gains. Also, in a bear market, the shares will seldom be called away, so he will experience a similar capital loss as the shares only trader, but the premium will be mostly retained due to expiring worthless, and so diluting losses. What have I got wrong?

    1. Gavin says:

      You’re pretty spot on. The only potential issue is if the stock prices rises a long way above the short call, which means it will be much more expensive to buy back in.

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