Covered Call Options Trading Strategy -- with David Moadel
hello friends and welcome to looking at the markets with David Modell going to
tell you about a couple of covered calls options strategies I'm going to give you
a basic one and then I'll give you a slight variation upon it all right
what's great about covered calls is that most brokers will probably give you
permission to sell a covered call after you buy a hundred shares of a stock or
ETF or whatever that's usually the basic level one options permission level okay
so if you just ask your broker to apply for you know selling covered calls
usually they'll let you do it not always but it's worth it's worth a shot because
it's a great way to get some extra income when you buy a hundred shares of
a stock or ETF because did you know that 80 percent of the time
eight out of ten times statistically speaking those options are overpriced
all options just on average options are overpriced so if you buy a hundred
shares of a stock and then sell a covered call the especially and act the
money covered call the stock probably won't move that much or won't have it
won't have moved up that much upon expiration compared to you know the
payment the payment you received the premium payments all right so whatever
premium payment you received the stock probably won't even move that much and
so eight out of ten times you'll be glad that you sold that covered call now
maybe twenty percent of the time yeah you'll you'll buy a hundred shares of
stock sell a covered call and then the stock price will just shoot up to the
moon and you know above and beyond the premium payment you got paid for selling
the covered call and then you might regret selling that covered call let's
let's say twenty percent of the time but eighty percent of the time it won't even
move that much so first let me explain what kind of covered call I usually
might sell usually it'll be at the money so let's say this is the the price at
which you purchased a hundred shares of stock or ETF or whatever right so this
is the act the money price right here all right and then this
would be out of the money okay above you know with a strike price above where you
bought the hundred shares of stock and this would be an int that so that this
is an out of the money covered call right and this would be an in the money
covered call meaning below the strike price is below the price at which you
bought the hundred shares of stock all right I will usually want to sell an at
the money covered call right at that the strike price being right at the same
price or close to it at which I bought the hundred shares of stock because you
get the most bang for your buck usually when you sell an out of the money
covered call up here you just don't get paid much your premium payment is
usually pretty small so yes you get to enjoy the upside potential movement of
the hundred shares of stock but as far as the premium payment itself it's
usually pretty paltry it's pretty small and now when you sell an in the money
covered call yeah you'll get a nice fat big premium payment upfront but then
when it's time for you to sell your hundred shares of stock you're selling
way down here you're selling at a very unfavorable price and so you get a big
fat premium payment upfront but then you lose un dup losing a bunch of money when
you have to sell your stock share you bought your stock shares here and you
have to sell them down here that's no fun so you know your net payment usually
ends up being not very favorable okay so yes you're gross payment you're up
upfront premium payment is bigger when you sell an in the money covered call
but usually net you don't get as much bang for your buck so as far as net you
know payment is concerned an at the money covered calls usually get the nice
nice fat payment in terms of net payments alright so and also at the
money covered calls oftentimes get some some really good theta decay also now
out of the money you know options have really good theta decay but at the money
options have pretty good theta decay as well in the money
options oftentimes do not have really good theta decay on them they just they
don't decay as much as you'd like to because you're a seller of that call and
you want it to deteriorate after you sell it as much as possible alright so
what about the expiration date well a lot of options experts will recommend
selling 45 days out okay until expiration or at least somewhere between
30 and 60 days out till expiration but as close to 45 days as possible is
oftentimes recommended you don't have to do that it really depends on how long
you want to have what your time horizon is maybe you don't have that much time
or maybe that maybe you want to think further out in time so it's really up to
you but I think if you want in terms of time the most bang for your buck I
really like to get as close to 45 days out as possible you get an you get some
really good theta or time decay that way and you get a decent payment all right
so to really get the most bang for your buck I recommend trying a selling and at
the money covered call and go as close to 45 days out as possible and when I
say try it you want a virtual or demo trade everything first before you commit
any real capital to it you want to try it out test it for yourself don't do
anything just because I I like it alright so that's this probably the
simplest covered call strategy that I can think of which is just 500 shares
and then immediately sell and at the money covered call 45 days out simple as
that alright or as close to 45 days as
possible so and again 80% of the time it won't even move as much as you got paid
for it alright so a variation on that and I'm gonna try to draw here and boy
here we go my drawing skills are really interesting alright but okay so let's
say you've got a stock right and here's the the stock price it
it goes wherever it goes down and then it starts to come back up my drawing
skills are terrible right and it starts to come back up right okay great and
then it's here and then you buy a hundred shares right fantastic and then
you sell you could sell and at the money covered call right then and there that's
the first strategy and that's fine you're probably not going to get a ton
of money though for your premium payment you'll get some money but not a whole
lot what you can do instead is buy your hundred shares right there and then wait
until the stock goes up and then sell your covered call okay because the stock
has gone up a lot now and what do you think happens to the covered call price
when the stock just goes up and up and up and up man you're going to get a nice
fat premium payment okay so at the money is now here right okay your buy price
for the hundred shares is down here but you're now selling at and at the money
covered call but at a higher price than where you bought it where you bought the
hundred shares of stock or ETF okay you're gonna get a nice fat premium
payment because options traders are really willing to pay a lot for those
calls now so yeah you'll you'll get a decent payment here but you'll get an
even bigger payment here and so you might want to consider that maybe test
that out test this strategy out with demo trading or virtual trading and see
if you like it better okay it takes a certain amount of patience to do that
because it's very tempting first of all if you didn't sell a covered call here
you just bought here and now the stock's up here it's very tempting just to sell
your hundred shares of stock for a nice profit all right from from here to here
you profit it just on the stock price rising but if you have patience if you
don't mind waiting longer to sell then you can get a nice fat premium payment
if you sell an at the money covered call up here and also think about it how much
higher is the stock likely to go now probably not much higher you know it's
probably exhausted by this point if it's gone up and up and up and up it could go
a lot higher but what's the likelihood we're talking about probabilities not
possibilities yeah it's possible it'll go up a lot more but usually it gets to
the exhaustion point point or at least a consolidation kind of point where just
goes sideways whatever chops around as they say trees don't grow straight to
heaven all right so usually stocks just don't
keep going up forever I probably always stocks don't just go up forever I don't
think I've seen one that does maybe there's one out there I don't know but
usually it takes a breather and so you can really enjoy the time decay here if
you sell a covered call right here you get a nice fat premium payment and
probably the stock won't go up much more so it's a pretty good place to sell that
covered call on one on your 100 shares of stock all right but again it takes
discipline and patience not to just take the money on your hundred shares and run
here and there's nothing wrong with doing that you don't have to sell a
covered call here if you don't want it but it's you know it's an alternative to
just selling it at the time when you bought the hundred shares all right
these were both valid strategies they have pros and cons so I recommend
testing them both out with virtual trading demo trading before you commit
any capital keep your position sizes small be
careful don't do anything because I like it
do it because you researched it and tested it out thoroughly and decided
that you're willing to take that risk alright hey if you like this hey why not
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