Let's talk about covered calls.
And I want to share my desktop
here because what I want to cover
is that I explain to you exactly
what is it?
Should you trade it?
I will give you a very specific
example, and we'll talk about
can you do it in a retirement
account? Now, covered calls are
fascinating, and covered calls are
usually the first option strategy
that new traders start trading
because it is super simple to
understand and it is perfect
for you if you already have stocks
in your account.
So let's talk about it.
What is it?
It complements the current
stocks that you have
in your account.
And we are talking about long
term stocks. We are not talking
about trading, we're talking about
stocks that you might hold for
a longer time, like months
or maybe even years.
So let me give you an example.
And the example that I want to give
you here is for JP Morgan.
So JP Morgan, as you can
see during the pandemic got hammered
when it came all the way down from
$140 to only
$80, and right now
it's just trading shy of $100.
Now, you might have JP Morgan
in your portfolio, you might have
had it in the portfolio before the
pandemic. So let's just go to a
monthly chart, because if you look
at a monthly chart here of JP
Morgan, you see that overall
it is a good company, or maybe even
you work for JP Morgan and
got shares.
It doesn't really matter, it applies
to any stock, whether it is IBM,
Boeing. So if you do have
stocks in your portfolio, let
me show you what to do, because
right now, if you had
JPM before the pandemic hit,
you're underwater.
I mean, right now on this one,
you're losing money.
Now, again, full transparency, I
don't own JP Morgan.
I don't hold any stocks long term,
I trade between five
and twenty-five days, that is my
typical holding period.
If you want to learn more about this
there's probably a link in the
description where you can learn
about my specific trading style.
But this is where we are at.
So let's say that you've got it at
$120, and $130, right now
it is trading at $96.
You still have this stock in the
portfolio and you hope that
eventually, it'll go back up you're
not willing to sell it just yet.
So let me show you exactly
what you can do with this.
Let's just say, for the sake of
simplicity, that you would buy it
today, that you would buy it at,
let's say, $96.
Now, the capital requirement
for this is, if you would buy it
right now, would be 100
times $96 per
share. So we're talking about
$9,600, close to $10,000.
Now when you have a stock, it is
very easy to understand how a stock
moves. If the stock moves up
by $10 to,
let's say, $106
you make 100 shares
that you have, times $10,
so this means that you're making
$1,000. Now, if the stock goes
up by $20, let's say the
stock goes up to $116,
you would make $100,
times $20 because
you bought it for $96,
right? And you're selling it, or
the stock is right now at $116.
So you would make
$2,000.
And if the stock goes down, let's
say the stock goes down from $96
to $86, super easy to understand,
right? It is 100 times
$10, so you would lose
$1,000.
So how does it work?
You're selling one call
for each 100 shares
that you have in your portfolio.
And here's what you do, when you
sell the call you choose
a short term expiration.
And here in this particular example,
we will use a 7-day expiration.
So we will choose a call that
expires in 7
days from now. And we are choosing
a so-called "out of the money"
call at a strike
higher than the current price.
Is this making sense thus far?
So let me show you what strike
might make sense, and then we're
gonna pretend to put the trade on.
So if you look at JP Morgan right
now and you say, "OK, I
want to see, I will
sell a call that
expires on,
let's say, July 17th." So
right here in a few days, in 7 days
from now, that's 5 trading days.
So what do you think?
How high could JP Morgan
go over the next few days?
Let's just say that you think it
will not go higher than
107.50.
So we can choose this, and
we'll take an option chain right now
and we'll see if this strike price
actually makes sense.
But if you look at J.P.
Morgan, you see this would be quite
a significant move for JP Morgan.
It means that it would have to go up
almost 10%, now a little bit
over 10%.
Is this likely over the next few
days? Probably not very likely.
So let's actually go to
a trading platform.
I'm gonna log in right now and I'll
show you exactly what this
trade would look like and
why it might make sense for you to
put on this trade because there are
some very specific examples.
So there we go, there we have JP
Morgan. And at first I want to
say, "Okay, what happens
if we put on a trade
and if right now we put on 100
stocks?" So here, as long
as JP Morgan goes up, we are making
money. If JP Morgan
is going down, we are losing
money. Super easy to understand.
Now we add to this
a covered call or a call.
So we are selling a call
right here with an expiration
of July 17th.
So as you can see, this is
in 7 days from now.
So a short term expiration here, and
we'll pick a strike price where we
say it is not very likely
that over the next 7
days, which is 5 trading days,
JP Morgan will go above it.
And I believe this is where we said
a $107.50, let's do
$107 right here.
So this is where we would sell
a call. And as you can see right
now, we would receive $0.55
for it. So this means if here
we buy the 100 shares
for $96, or let's
say we still own them, right?
And at the same time, we would sell
the 107 call that
expires 7/17,
so in 7 days for now.
The capital requirements for this
are exactly the same.
So the broker will not ask you
for additional capital requirements
when you're selling a call against
stocks that you're owning.
So here, it is still
$9,600. Now, here's the deal.
You are receiving right now $55
if you are selling this call because
options are being traded in 100
packs. By the way, if you aren't
familiar with options and you would
like to have an Options
101 course, I got you covered.
In fact, that is for free.
If you go to rockwelltrading.com/101,
I'll send you an Options 101 course,
there's 12 lessons completely free
just enter your email and your first
name so that I can address you by
name and this way you
would get this course that explains
you more of what all options are
about. So if the stock goes up to
$100, you would make the
$1,000 that you make on the stock,
plus you make an additional $55
that you receive as a premium by
selling one of the calls.
Now you might say, "$55?
That doesn't make sense." Well,
bear with me for a second because
you'll see why this might
make sense for you.
So as you can see, you're increasing
your profits by $55.
Again, not a whole lot.
Admit it, but wait for it.
It'll get really, really good.
So the same is true if
the stock goes up to $116.
So in this case you would make
$2,000 plus $55
so you would make $2,055.
Now lastly, of course, if the stock
is going down, you lose $1,000,
but you're keeping the premium,
the $55 so therefore
your loss gets reduced
to $945.
So it is still a loss, but
as you can see, the loss is smaller
than here. Now, again, the question
is, why would you worry
about $55?
Well, let's continue our math.
So what you're doing here is
you make $55
in seven days.
So this means if we take the $55
divided by 7 days, that
you make approximately $8 per
day. So based
on the initial capital, so
if you take the 8 and divide
it by $9,600
that you had to invest in order to
buy the stocks it is not
a whole lot, approximately
0.08% per day.
Now, you might say, "What the heck?
That's nothing." If you take this
0.08 times 360,
you would make an additional
30%.
Now, you might be wondering, "Why do
I do it?" Now, this is in addition,
whatever you make on this
stock that is going up.
So what do you think?
Does this sound a little bit more
exciting if you make an additional
30% per year?
The $55, that's not
the deal. The $8 a day, it's
not a big deal.
And there are possibilities
where you can make more money, where
you can make $10 a day,
$12, $15, sometimes
with the right stocks you can
even make $20
a day or more.
So this then means that you're
making not only 30% additional
per year, but you would make 40%,
50%, maybe even 60%.
Should you trade it?
Absolutely if
you're holding stocks in the long
run, because it is almost
like free money.
Now, one of the things, very
important that you need to
understand when selecting the
strike price, and you see we
selected here a strike price of
107, if at expiration
if the stock is higher
than the strike price that you
selected, you have to
sell the stock at this
price. If it goes up to 107,
you have to sell
your shares for
$107. So you would only make
$1,100 plus $55. So this is
the one danger of trading
a covered call because
you might lose the shares.
But here's the deal.
What can you do the next day?
The next day, you can buy the shares
again, especially these days
where stocks are super
inexpensive.
So I wouldn't be too concerned about
getting called away because you can
buy them back the next
day. If you like this
idea of covered calls I decided
to do a class on covered calls
to show you exactly of how
to do this. Not quite sure yet
although, to be honest, if I will do
it. But you can register
at rockwelltrading.com/blueprint.
This is only a waitlist.
You can register on this waitlist
and if I see that there's enough
interest, I'll do the class.
Now the class will be super
inexpensive, it's very
affordable.
It'll probably not even cost $200,
haven't decided yet.
So just let me know if you're
interested if so, put your
name on the list here, and then
if there's enough interest I will
announce the date and also the
investment for this class here.
And I'll explain in detail what
covered calls are, what strike
price you should select, for which
stocks that make sense, and we'll
also talk about the poor man's
covered call that we covered
in the previous video.
So just to wrap it up here, first of
all, what is it?
What is a covered call?
Well, it compliments the current
stocks that you have in your
account.
You would sell one call
for each 100 shares that you have in
your portfolio.
You choose a short term expiration
of 7 to 14 days.
Choose an out of the money call at a
strike higher than the current
strike price.
Should you trade it?
Absolutely.
Here's a specific example, and now
the key question is, can you
do it in a retirement account?
And the answer is yes
if you can trade options.
And in order to trade options, you
have to tell your broker that you
want to trade options.
So, yes, it is possible to do it in
the retirement account.
Talk to your broker because your
broker might ask you, "OK, what
exactly do you want to do?" And he
has to give you special permission.
Anyhow, hope that this video helps
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