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I am researching writing covered calls on S&P500 index. So in order to sell covered call I need to buy a contract for S&P500 index. I've never traded indexes. What exactly I will be buying (since this index is a composite of 500 stocks...)? How much will this contract cost? How does it work? Thank you so much in advance! :)

  • There are many answers but one warning: If you are going to trade option then you'd better use SPY instead of other S&P500 ETFs because of the liquidity. – user67084 May 23 at 7:05
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    If you don't already own the underlying (and don't want to own it), buying the underlying and selling a covered call is mathematically equivalent to selling a put (without the upfront cost of buying the underlying). So just do that. – D Stanley May 23 at 15:41
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The SPDR® S&P 500 ETF Trust (symbol SPY) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY

Options are available on the SPY:

http://www.optionistics.com/quotes/stock-option-chains

The call's premium will depend on the strike price and expiration week/month chosen (100 times the quote). Since you are writing (aka selling) a covered call, you will sell one call per hundred shares of SPY that you own. You will receive the premium as a credit.

If this is anything other than a homework assignment, consider doing some serious reading about options in order to avoid being cannon fodder :->)

  • Thank you so much for your response. I do have a quite detailed knowledge how options work. The items that you've suggested are buying ETF and writing a call against this ETF. I understand how it works. However if you go to Yahoo and look at S&P 500 you'll be able to see the options on this index. So my question is: how do I write a covered call? How do I buy this index? – GemStone May 22 at 21:33
  • You cannot buy the index so your choices include buying the 500 stocks, an ETF like the SPY that attempts to duplicate it, a futures contract, or a high delta far expiry call LEAP. The SPX options are cash settled so effectively, you are synthesizing a covered call via whatever aforementioned replacement underlying that you buy. – Bob Baerker May 22 at 22:22
  • Thank you so much Bob. So here is another question then: If I BUY a call option for S&P 500 index and then, granted it went up in price, became in the money, and I would like to execute it: will I end up with shares of one of ETFs tracking S&P 500? Or how does that gonna work? – GemStone May 24 at 13:51
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    Execute it? You can buy and sell them any time that you want but if you meant 'exercise' then no, you cannot. SPX options are European which means that they cannot be exercised. They are cash settled (cboe.com/strategies/product-specific-strategies/spx/…). When you exercise a long option, you end up with a long or short position in the underlying. SPY options become SPY shares. AAPL options become AAPL shares. Etc. – Bob Baerker May 24 at 14:22
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You can buy shares of exchange traded funds and sell covered calls on those funds. Look at SPY, VOO, & IVV as some common examples.

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To sell a covered call you do not need to buy a contract instead you need to buy 100 shares of a security that tracks the S&P500.

You should consider buying one of the common S&P 500 tracking ETFs such as SPY, VOO or IVV.

To facilitate this you will have to open an option trading brokerage account or add options trading to your existing brokerage account (where you own at least 100 shares of the S&P500 ETF security you have chosen).

Once you own the securities AND you have the options trading agreement in place, then you will be able to sell a covered call (1 covered call per 100 shares).

As to how you place the actual trade, it will be very similar to trading any security but you will have to choose the strike price and date for the contract you will sell.

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