Let's talk about poor man's
covered call.
What is it? Who is this
for? And when to use
it? And as always, I want to show
you very specific
examples.
And the reason why I'm talking about
covered calls today is
because the poor man's covered call
is a very specific type
of spread.
And as you know, we have been
covering options spreads
for the past few sessions.
So we actually have a playlist
right now that shows you
everything that you need to know
about options spreads.
So here what you see is an option
debit spread and this is from a
video that I did earlier.
So today I want to talk
about a covered call and I want
to show you exactly what is the
difference between
trading stocks, trading
a covered call and trading
a poor man's covered call, and what
is a poor man's covered call.
So let's first talk about stocks
and I want to use Boeing, BA
as an example.
So, as you can see, Boeing right now
is trading at $180,
dead smack.
OK? So let's say
that you are bullish
on Boeing and that you expect that
Boeing will go higher.
Let's just say, right?
So this is where many people start
with trading stocks, and
therefore when trading stocks, you
would buy 100 stocks
of Boeing and you would buy it
right now at
$180. So the capital requirements,
if you are trying to trade
100 shares of a
stock, is here 100
times $180, so
this would be $18,000.
If you don't have a margin account,
so right now, I assume that you
have, let's say, a retirement
account or not a margin account, so
you are buying 100 shares
for $180 each, so that
would be a capital requirement of
$18,000. Now, let's see what
happens if the stock goes
up by a whopping $10.
If this happens you would make
$10 times 100 shares, so you
would make $1,000.
Making sense?
So if the stock goes up from
$180 to $200, you would make
$2,000. Super easy to understand.
Now, let's say what happens if the
stock drops by $10?
Well, what would happen is you lose
$1,000.
So super easy to understand, and
this is what most people do when
they start trading, they start
trading stocks.
And then as they are getting
interested in options,
the first strategy that most
people do is
trading covered call.
Now, first of all, let me show you
as we are going to Boeing here,
let's just say we would buy
100 stocks of Boeing, and
let me just go to the analysis.
See, super easy to understand,
that's what we talked about.
If you go from $180 to $190,
we are making $1,000.
Here we are making $2,000 and
as the stock price goes down,
we are losing money.
This is what you see here on the
screen. Now, if you
look at the chart, you might
say, "You know what? I think that
Boeing will go up in the long run.
But over the next few weeks, looking
at the chart here, I don't think
that Boeing will go
above $200." Here's
why this is important.
For the covered call, you would now
say, "OK, I buy
100 stocks at $180, and
at the same time, I am selling
a 200 call."
And here we would say,
you know what? Today is July 8th,
so let's say for the next 10 trading
days so we would sell one that
expires on July 24th.
Now, let me show you exactly what
happens when we do
this.
So I will here add
another trade into this for
July 24th, I will sell
a 200 call.
And you see, for the 200 call right
now we are getting $4.50.
So the capital requirements, when
you do this, when you sell a call
against stocks that you own,
it is still the same.
You don't have to bring more capital
to the table. So it is still
$18,000.
So what happens if the
stock goes up? Now, first of all,
as we sell this
200 call, we
are receiving $4.50.
Now options trade in 100 packs,
so we are receiving
$450. So if the stock
goes up by $10,
we are making the
$1,000 that we would make with a
single stock, but we also,
in addition, we are making
$450 the premium
that we received for selling
the call. When we sell a call, we
receive a premium and that is what
we get. So this means that we
make a total of
$1,450 and you already see the
difference here.
So by adding a covered call,
if the stock goes up
by $10, not
only do we get the $1,000
from the stock rising,
but we also get the premium
that we actually receive by selling
the call. So we are increasing
our gains by 45%.
Now, the same here if it goes
up to $200, we are
receiving $2,000 plus
the $450 so
this means we make
$2,450. So again, we are making
more than we would make if we would
only trade the stock.
Now, here's the cool thing.
And you know that we have been
talking about debit spreads already,
so why would you trade a debit
spread? Why would you sell a
call against stocks?
Well, not only to increase
your gains, as you can see here,
but also to reduce
possible losses, because if
the stock, if Boeing goes down
to $170, you would
lose the $1,000,
but you're getting the $450
in premium.
Therefore, you're only
losing $550.
So as you can see, it does
make sense to trade a covered
call. This is why many stock
traders, the first thing they do
when trading options is
selling a covered call because
you're amplifying your gains
and at the same time, you
are reducing your losses.
So is this making sense thus far?
Because I want to show you what the
poor man's covered call is, and
I want to show you exactly of what
are the advantages and disadvantages
of having a poor man's covered call.
But I want to make sure that this is
helpful. If it is, do me a favor and
click on like really quick or just
say, "yes" in the comments so that I
know that I'm not going too fast
or too slow, that I'm actually going
at the right speed.
So why would you trade
a poor man's covered call?
When would you trade it?
If you don't have $18,000
in your account. Because you see,
this is what is required
when you're buying 100 shares of
Boeing.
And let's say that in your account,
you only have
$10,000. How does a poor man's
covered call work?
Instead of stocks,
you can buy an option, and
you would buy an option that is deep
in the money at a later
expiration.
So not at the same expiration
because in the long run, again, you
think that the stock stays above the
current price and moves slightly
higher. So we sold the July 24th.
The first thing I want to do here is
get rid of the shares because
instead of the stocks,
we want to buy an in the money call.
So that's what we are doing, we are
going to the table.
We are going out a month
or two. So usually it's one to two
months out, I choose a little bit
less than two months out, so the
September and I'm looking
at the 110 call.
Now again, right now Boeing is
trading at around $180
so why do I go for the
110 call?
We want to see a delta
of
0.95. Because what does it mean?
A delta means that if the stock
is moving a dollar, the option
is moving $0.95.
And you see the deeper in the money
your call, the higher the delta.
The delta is usually never one,
and I like to have a delta
of let's say 0.95.
So here we don't have exactly
0.95, so I go for 110
call and this is what
we want to buy.
So we are buying the 110
call. As you can see right now,
it costs around
$71.
So let's talk about it.
So the poor man's is we are still
selling the 200 call,
and now we are buying the 100
call with an expiration
of September 18th.
Now what are the capital
requirements?
So we are no longer buying the
shares, we're buying the call,
and we are buying one call, which
is basically for 100 shares,
and we are buying this at
$71 so this means our capital
requirements are
$7,100. As you can see, this
is a fraction of the
cost for buying a stock.
We are still selling the 200
call. But the main difference here
is, instead of buying a stock
we are buying a call.
Now, let's see what happens if the
stock goes up from
$180 to $190.
And this is where we are going to
our risk graph and we see if it goes
from $180 to $190
right here, you see that now
we would make
$1,335. As you can see, this
is slightly less than the
$1,450 that we would make with a
call. Why?
Because again, the option has a
delta of 0.95,
so it only moves 95%
of the stock. So if the stock moves
$10,
the option would only be worth $9.50
more. Is this making sense?
Okay, so let's see what happens
if the stock goes up to $200,
and we're going back to our risk
graph here and we see if it goes
up to $200, we make $2,320.
You see it right here.
So we will make
$2,320. So, again, as you
can see, not as much
as we would make with a covered
call, definitely more
than we would make with a stock, but
you need much less money.
The cool thing is, with a poor man's
covered call, you're almost
making as much, you make
95% of the money that you would make
with a covered call, you would make
more money than just having
an outright stock, and
you need to bring much less capital
to the table.
OK. Now let's talk about, of course,
when the stock is moving against
us. So when the stock is moving
against us here and we say it goes
down to $170,
we would lose
$675. So we are losing a little
bit more than we would lose with a
covered call, but
not as much as we would lose
if we would only trade the stock.
So as you can see thus far, it
sounds awesome. Why wouldn't you
trade the poor man's covered call
all the time?
Why are people trading stocks?
Well, that's what I want to show you
right now, where the problem
is so that you know that there
is a downside to this.
I mean, there's always a downside to
it. So the problem starts
if the stock goes up
above the strike price
that you're selling, because with
the strike price that you're
selling, you basically say,
I am willing to sell the
stocks at $200,
right? So if you just
have the stock and it goes up to
$220, you would make
$40 times 100,
so you make $4,000.
Nice! Right?
I mean, this is assuming that Boeing
jumps up to $220.
What does it look like here?
Well, again, you are capped
because you bought the stock for
$180, but you have to sell it
at $200.
So this is why on the stock
if it moves up to
$220, you only make
$20.
So $20 times 100 is
$2,000 for the stock.
Plus of course, the $450 this
is the premium that you always
get so as you can see, it
would be $2,450.
So you're capped here, meaning that
you don't make as much as having
the outright stock.
Now with a poor man's covered call,
this is very similar to a covered
call so you are capped.
Let's take a look at this.
What is your cap here?
It is $2,320.
So let's go back here, and you see
it is $2,320.
This brings us back to we talked
about it, what is a poor man's
covered call?
Instead of buying stocks, you would
buy a deep in the money call at a
later expiration.
When should you trade it?
If you don't have enough money in
your account but you want to trade
more expensive shares.
And the important thing is, the idea
is that the stock stays above the
current strike price and moves
slightly higher. Now, here's the
deal, this cap that
you put on the stock expires
in 10 trading days from now, 7/24.
Today is July 8th.
So and again, we have two weekends
in between.
So this is why it expires
in ten trading days.
So as long as Boeing
stays below $200,
it definitely makes sense to
trade the covered call.
And do you actually lose money
if Boeing would go above 200?
Do you lose money?
No.
The only thing is that you wouldn't
make as much money as
if you had traded the outright
stock. But overall, as you can see,
the advantages of trading
a covered call, or trading
a poor man's covered call, if
you're long term bullish on a stock,
that's the important thing, if
you're long term bullish on a stock,
then the advantages of
trading a covered call or a poor
man's covered call
outweigh the disadvantages
then trading a stock.
And before you trade a covered call,
if you don't have any stocks in your
portfolio, consider
trading a poor man's covered call.
Well, has this been helpful?
I hope it has.
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