Active QQQ Covered Call Strategies

Abstract

This article examines QQQ covered call strategies from January 2002 through January 2012 and finds that downside risk-adjusted returns are attractive both on an absolute basis and relative to those of long QQQ positions. The study then presents a framework that partitions covered call positions into delta neutral short call and long equity positions, which highlights the separability of decisions about delta neutral short option and long equity exposure within a broader class of short call strategies that includes covered calls. The author then demonstrates that selling QQQ call options and buying QQQ shares on a delta neutral basis both without and with delta rebalancing offers attractive risk?reward tradeoffs. He then constructs out-of-sample implied volatility fitted values and examines the performance of covered call and delta neutral short call strategies when estimates indicate that implied volatility is more overpriced than usual. These conditions substantially enhance the performance of covered call strategies as well as short delta neutral call strategies.