Why worry when options are this cheap? You can purchase a 2.1 year collar on SPY that limits your capital gain/loss possibilities, including premium paid, to be somewhere between -7.5% and +13.5%. Just buy the put at-the-money and sell the call 21% out-of-the money. Keep the 1.8% dividend during the ride and rest easy.
Historically, stock corrections of 10-20% have occurred every few years, so such a deal might be your ticket to skip the next correction. Be aware that the price of this collar will rise once the volatility arrives.
Hmmm. Agree that options are cheap these days. So why sell the call at all? It would only offset the cost of the position by a about 12.5% (~$300). Why not just buy the insurance (the ATM put, ~$2360), so you don't cap your upside potential on the underlying? Basically, you're paying an extra 38.5 cents per day, but you get to keep all the upside, and restful sleep, for 2+ years.
Welcome to my mental world of dilemmas.
You're right. The short call doesn't contribute much revenue when it's that far OTM, and it only slightly improves resistance to time decay.
I wanted to keep the explanation simple, so I worked with one date. If I executed this strategy in reality, I would sell the short call over and over again at 1-2 month durations and safely OTM, harvesting time decay faster and more repetitively. So sort of a calendar-collar. This would only work in a very low-cost trading account, and it would consume a lot of time, making the simple put position more and more attractive. Also, I would roll that 2-year put at some point to avoid accelerated time decay, unless SHTF at that moment.
Yet, even that seems like a hassle compared to just selling everything, putting 90% in treasuries and 10% into calls. Such a position would mostly mimic a 100% all-stock position at maturity, dividends and all. However, it would only have 10% maximum downside (i.e. 100% of the incredibly cheap cost of the calls).
There are lots of options options.
Interesting alternatives. Maybe rolling a shorter duration collar with a closer to-the-money short call would be more attractive, assuming you don't mind the extra effort in maintenance (I personally wouldn't mind).
E.g., if I get called away after an 8% gain in 3 months, who cares? I'll just buy the underlying back, and put on another collar, and be quite content to bank my 32% annualized gain (minus the net debit of the long put and the short call) on the underlying.
It would obviously be a cash drain if the market goes sideways for 2 years, but so would the 2 year put. Shorting a closer-to-the-money call would reduce my insurance premium meainingfully. This position is all about insurance. Even when insuring a car, it's all about paying a premium for coverage that you hope you never need. The only real difference is that in the market you will most certainly need it, eventually.
It's a pleasure exchanging thoughts with you, as it always is.
Edit to add: I should have set up a 3 month collar before posting. Even just 8% away, a short call only brings in pennies. It only offsets the cost the position by a paltry 2.7%. Pathetic, really. So I guess the collar strategy is going to be out of season for awhile. Long puts only, or just ride without a saddle.