Covered Writes and a Drop in Implied Volatility

When you write a call option a drop in implied volatility is a great thing, as the value of the call will decline in response to the drop in volatility. A trade I have on illustrates this point nicely.

I wrote the CME November 320 calls last Friday (against stock I owned) at $14.60 a contract. The stock was at exactly $316 a share when I wrote the calls. Two trading days later, CME is trading at $317.37 (up $1.37 a share) while the calls are trading at $13.05 (the mid-point of the current bid - ask spread), for a profit on the options of $1.55 a contract.

How can the stock rise and the calls fall? The answer of course is a drop in the CME's impled volatility. The stock has traded sideways for the past few days and the volatility has rapidly fallen away.

Of course, if I had bought the calls on Friday I would be cursing the trading gods..............