Covered calls as a stock market trading strategy David Jaffee with BestStockStrategy.com
where I teach people how to trade options, covered calls as a
trading strategy. I think it's ok it's a good way that you can add an
incremental 5% or so on an annual basis to your portfolio but the reason why I'm
not a huge fan is selling cover calls is simply because I'm not a fan of owning
stocks I think that when you own stocks is a very capital inefficient way that
does not provide you with a high probability of profit the better way
instead of owning stocks for example if you want it let's say Amazon right now I
was trading at 1550 instead of just buying 100 shares at Amazon you're much
better off simply selling a 1500 put on Amazon that way in the worst case
scenario you will end up owning Amazon at $1,500 and if you sold a $1,500 put
on Amazon you'd probably end up collecting around $10 so as a result on
a net basis your acquisition price for Amazon will be 1490 as opposed to buying
Amazon in the open market and paying $60 more at $1550
dollars so a covered call would mean that let's say you are long a hundred
shares of Amazon at a price of 1550 and then you decided to sell one contract
one covered call contract of Amazon at a price of like 1650 you'd probably in
that situation collect around $8 of premium and that's okay that would then
reduce your basis price of Amazon which you bought at 1550 down to 1542 but in
that situation if you're trying to reduce your basis and improve your
acquisition price of the underlying stock you might as well not even own
stock at all because there's a much better way which is to simply sell a put.
So again covered calls are decent if you're older, if you're very risk-averse
and you don't want to get into selling vertical credit spreads or trading naked
options then adding the covered call strategy would
be a great way to add around 5% annual increase in your in your portfolio
which I think would be great because a lot of people don't even make 5% a year
so if you're older if you're extremely risk-averse if you don't have the
determination or the discipline to learn about how to deploy options trading
successfully so that you can be a successful trader then selling cover
calls will be a very easy way for you to add an incremental 5% of return to your
account year. But the fact is, and just like the example that I gave, it
really doesn't make any sense for you to own stock. There's no point for you to
own stock when you if you want to go long stock you can simply sell a put if
you want to go short stock instead you can just simply sell a call so there
really is no point it's not advantageous it's very capital inefficient because on
a regulation T perspective from the margin basis the stocks will eat up 50%
of your margin whereas options will only eat up 20% so
you have much better leverage but at the same time leverage is a double-edged
sword so you have to be a lot more careful but you can also have a much
wider safety net like with the example that I gave previously instead of buying
Amazon in 1550 like you would if you chose to go long stock you would then
sell an option with a strike price of 1500 or you can even decide to sell an
option with a strike price it up at a 1450 that way if Amazon falls to like
1450 you would own it at 1450 as a and you would collect that premium instead
of buying Amazon outright at 1550. So cover calls I think it's okay it's good
for older people it's good for people who don't want to learn how to trade
options successfully and it's very easy to deploy so if you're long 500 shares
of Facebook and Facebook right now is trading around 133 you can sell 5
contracts 5 calls of Facebook with a strike price of 140 that way you can
probably collect around 80 cents a premium per share so therefore if you
were a long facebook at a price of 135 then you would subtract out that 80
cents per share a premium and you would be long Facebook would reduce your basis
to $134 dollars and 20 cent but there's a better way if you want to
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