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Coveredcalls

Options Blueprint Series: The Collar Strategy for Risk ReductionIntroduction to Nasdaq Futures Nasdaq Index Futures offer traders exposure to the Nasdaq-100 index, a benchmark for U.S. technology stocks, without directly investing in the index's component stocks. Trading on the Chicago Mercantile Exchange (CME), Nasdaq Futures provide a critical tool for managing market exposure on the future of technology and biotech sectors. Key Contract Specifications: Point Value: Each point of the index equates to $20 per contract. Margins: As determined by the CME, margins vary, reflecting the volatility and current market conditions. As of the time of this publication the CME website shows a maintenance margin of $17,700 per contract. Trading Hours: Nearly 24-hour trading capability, aligning with global market hours to provide continuous access for traders. It's important to note that similar strategies and benefits are available with Micro Nasdaq Futures , which are scaled down to a tenth of the standard Nasdaq Futures, making them accessible to a broader range of traders due to their lower margin requirements (Margin is 10 times less, point values are 10 times less, etc.) Basics of the Collar Strategy The Collar strategy is a risk management tool used by traders to protect against large losses in their investments while also capping potential gains. It is particularly useful in volatile markets or when significant price swings are expected but their direction is uncertain. Components of the Collar Strategy: Own the Asset: Typically involves owning the underlying asset, but in the case of futures, it involves holding a long position in the Nasdaq Futures contract. Buy a Protective Put: This put option gives the right to sell your futures contract at a predetermined strike price, serving as insurance against a significant drop in the market. Sell a Covered Call: This call option grants someone else the right to buy your futures contract at a set strike price, generating income that can offset the cost of the put option, but it limits the profit potential if the market rises sharply. This strategy forms a price collar around the current value of the futures contract, protecting against drastic movements in both directions. The use of this strategy in Nasdaq Futures trading can be especially effective given the index's exposure to high-growth, high-volatility sectors. Application to Nasdaq Futures Implementing the Collar strategy with Nasdaq Futures involves selecting the right put and call options to effectively hedge the position. Here's how you can set up this strategy: Choose the Underlying Contract: Decide whether to use standard E-mini Nasdaq-100 Futures or Micro mini Nasdaq-100 Futures based on your investment size and risk tolerance. Select the Put Option: Identify a put option with a strike price below the current market price of the Nasdaq Futures. This strike should represent the maximum loss you are willing to accept. The graphics of this article show UFO Support Price Levels below which accepting a larger loss could be seen as a form of hope. Using UFO Support Price Levels as a reference to select the Put strike could be an efficient manner to determine the desired risk. Choose the Call Option: Pick a call option with a strike price above the current market level, where you believe gains will be limited. The premium received from selling this call helps offset the cost of the put, reducing the overall expense of the setup. Selecting a call with its premium equal to the put price would allow for the Collar strategy to be cost-free (not risk-free). Risk Profile Visualization: A graphical representation of the risk profile will show a flat line of loss limited to the downside by the put and capped gains on the upper side by the call. This visualization helps traders understand the potential financial outcomes and their likelihood. Forward-Looking Trade Idea Considering the recent market dynamics, Nasdaq Futures have been experiencing a range-bound pattern after reaching all-time highs. With current geopolitical tensions such as the recent conflict between Iran and Israel, there's a potential for sudden market movements. Scenario Analysis: Continuation of Uptrend: If the market breaks above the range, selling the covered call may yield limited gains but will provide premium income. Significant Drop: If the market drops due to intensified conflicts, the protective put limits the potential loss, safeguarding the investment. That is knowing that if the market was to rebound after a significant drop, the strategy could end up as profitable as long such rebound would happen prior to the Options expiration date. Trade Setup: Entry Point: Current market price of Nasdaq Futures. Put Option: Select a put option below the current market price. The chart example uses the UFO Support Level located around 18,000. Premium paid for the 18,000 Put is estimated to be 511.79 points * $20 ($10,235.8). Call Option: Choose a call option above the current market price targeting the same level of premium as the premium paid for the put. The 18,300 Call is estimated to provide 522.65 points * $20 ($10,453). Expiration: Options with a 1-3 month expiration to balance cost and protection level. This trade example uses June Expiration which is 67 days away from expiration. As seen on the above screenshot, we are using the CME Options Calculator in order to generate fair value prices and Greeks for any options on futures contracts. This setup aims to utilize the Collar strategy to navigate through uncertain times with controlled risk, taking into account both the potential for continuation of the uptrend and a protective mechanism against a sharp decline. Risk Management Discussion Effective risk management is crucial when trading futures and options. The Collar strategy inherently incorporates risk management by design, but understanding and applying additional risk control measures is essential for successful trading. Key Risk Management Techniques: Limited Risk: By default, the Collar strategy is a limited risk strategy where the risk is calculated by looking at the current Nasdaq Futures price compared to the Put strike price and adding or subtracting the Collar execution price for a debit or credit respectively. Use of Stop-Loss Orders: Although the Collar strategy provides a natural hedge, setting stop-loss orders beyond the put option's strike can provide an extra safety net against gap risk and extraordinary market events. Regular Review and Adjustment: As market conditions change, the relevance of the chosen strike prices may alter. Regularly reviewing and adjusting the positions to ensure they still reflect your risk appetite and market outlook is advised. Diversification: While the Collar strategy protects an individual position, diversifying across different asset classes can further protect the portfolio from concentrated risks associated with any single market. Conclusion The Collar strategy offers Nasdaq Futures traders a structured way to manage risk while maintaining the potential for profit. By capping potential losses with a protective put and limiting gains with a covered call, traders can navigate uncertain markets with increased confidence. This strategy is particularly applicable in volatile markets or during periods of geopolitical tension, providing a buffer against significant fluctuations. When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies. General Disclaimer: The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
CME_MINI:NQ1!Education
by traddictiv
Options Blueprint Series: The Covered Call Strategy DecodedIntroduction In the ever-evolving world of financial markets, savvy investors and traders continuously seek strategies to optimize returns while managing risk. Among the plethora of strategies available, the covered call stands out for its simplicity and efficacy, especially when applied to a dynamic asset like Euro Futures. This article delves deep into the intricacies of the covered call strategy, using Euro Futures as the underlying asset. Through this exploration, we aim to equip you with the knowledge and tools necessary to navigate the complexities of the futures and options markets. By the end of this journey, you'll gain a comprehensive understanding of how to implement covered calls with Euro Futures, enhancing your trading arsenal with a strategy that balances potential returns against the inherent risks of the forex futures market. Understanding Euro Futures: The Beacon of Currency Markets Euro Futures on the Chicago Mercantile Exchange (CME) represent a contract for the future delivery of the Euro against the US dollar. These futures are pivotal for traders and investors looking to hedge against currency risk or to speculate on the fluctuations of the Euro's value relative to the dollar. Each Euro Futures contract is standardized, with each contract representing a specific amount of Euros. Trading Euro Futures offers a transparent, regulated market environment with deep liquidity, making it an attractive instrument for a broad spectrum of market participants. The futures are marked-to-market daily, and gains or losses are credited or debited from the trader's account, providing a clear view of financial exposure. Key Features of Euro Futures: Contract Size: Each contract represents 125,000 Euros. Tick Size: The minimum price fluctuation is $ 0.000050 per Euro, equating to $6.25 per contract. Trading Hours: Euro Futures markets are accessible nearly 24 hours a day, allowing traders from around the globe to react to market-moving news and events in real-time. Leverage: Futures trading involves leverage, allowing traders to control a large contract value with a relatively small amount of capital. However, while leverage can amplify gains, it also increases the potential for losses. Market Participants: Hedgers: Corporations and financial institutions may use Euro Futures to protect against adverse movements in the Euro's exchange rate, securing pricing or costs for future transactions. Speculators: Individual and institutional traders may speculate on the future direction of the Euro's value against the dollar, aiming to profit from price movements. Importance in the Financial Landscape: The Euro is the second most traded currency in the world, making Euro Futures a critical tool for managing currency exposure in the international financial markets. The contracts provide a gauge of market sentiment towards the Eurozone's economic outlook, influenced by factors such as interest rate differentials, political stability, and economic performance. The Basics of Covered Calls: Charting a Course The covered call is a conservative strategy where the trader owns the underlying asset — in this case, Euro Futures — and sells call options on that same asset to generate income from the option premiums. This strategy is particularly appealing in flat to moderately bullish market conditions because it allows the trader to earn an income from the premium, which can provide a cushion against a downturn in the market and potentially enhance returns in a stagnant or slightly bullish market. Key Concepts of Covered Calls: Ownership: The trader must own the Euro Futures contracts or be long on a futures position to write (sell) a covered call. Option Premium: The income received from selling the call option. This premium is the trader's to keep, regardless of the option's outcome. Strike Price: The price at which the underlying futures can be bought (call) by the option buyer. The trader selects a strike price that reflects their expectation of the market direction and their willingness to part with the futures if the option is exercised. Expiration Date: All options have an expiration date. The covered call strategy involves choosing an expiration date that balances the desire for premium income with the market outlook. Implementing the Strategy: Selection of Euro Futures Contracts: The first step is to have a long position in Euro Futures. This position is the "cover" in the covered call strategy. Selling the Call Option: The trader then sells a call option on the Euro Futures they own, receiving the option premium upfront. This option is sold with a specific strike price and expiration date in mind. Outcome Scenarios: If the Euro Futures price stays below the strike price at expiration, the call option will likely expire worthless, allowing the trader to keep the premium as income while still holding the futures position. If the Euro Futures price rises above the strike price, the call option may be exercised by the buyer, requiring the trader to sell the futures at the agreed strike price. This caps the trader's upside potential but secures the premium as profit. Risk Profile Graphic for the Covered Call Strategy on Euro Futures: This graph illustrates the profit and loss potential of a covered call strategy applied to Euro Futures. The strategy involves holding a long position in Euro Futures while selling a call option at a specific strike price. If the Euro Futures price at expiration is below the strike price, the trader's loss is offset by the premium received from selling the call option. However, the profit potential is capped if Euro Futures rise above the strike price, as the trader may have to deliver the futures at the strike price, missing out on further gains. Implied Volatility and CVOL: A Navigator's Tool In the strategy of covered calls, understanding Implied Volatility (IV) is essential. IV reflects the market's expectation of a security's price fluctuation and significantly influences option premiums. For traders employing covered calls, especially with Euro Futures, high IV can mean higher premiums, offering better income potential or protection against the underlying asset's price movements. Since the Euro Futures is a CME product, examining CVOL could provide an advantage to the trader as CVOL is a comprehensive measure of 30-day expected volatility from tradable options on futures which can help to: Determining Premiums: By gauging current IV, traders can identify optimal premium levels for their call options. Deciding which Strategy to use: High IV periods might indicate advantageous times to implement covered calls, leveraging CVOL's insights for timing entry and exit points. Benefits and Risks of Covered Calls: Income Generation: The most apparent benefit of the covered call strategy is the ability to generate income through the premiums received from selling call options. Downside Protection: The premium received can offer some “protection” against a decline in the futures price, effectively lowering the break-even point. Profit Limitation: A significant risk of this strategy is that the trader's profit potential on the futures is capped. If the market rallies strongly beyond the strike price, the trader misses out on those additional gains, as they are obligated to sell the futures at the strike price. Initiating a Covered Call with Euro Futures: Setting Sail Implementing the covered call strategy with Euro Futures involves a blend of strategic foresight and meticulous planning. The objective is to enhance potential returns or protect against downside risk through the calculated sale of call options against a long Euro Futures position. Here's a step-by-step guide to navigate through the process: Step 1: Selection of Euro Futures Contracts Long Position Establishment: Begin by establishing a long position in Euro Futures. This position acts as your safety net, providing the necessary coverage for the call options you're about to sell. Margin: When going long Euro Futures, the Margin Requirement (suggested by CME on Feb-21 2024 is USD 2,100 per contract) Market Analysis: Conduct a thorough analysis of the Euro Futures market. Consider factors like historical volatility, economic indicators affecting the Eurozone, and any impending events that might influence the Euro's value against the dollar. The chart shows how careful key Support and Resistances have been selected in order to decide when to buy long Euro Futures as well as deciding the Call Strike Price to use. Other techniques can be employed depending on the trader’s plan and methods. Step 2: Selling the Call Option Strike Price Decision: Choose a strike price that aligns with your market outlook. A strike price above the current market price can offer potential for capital appreciation, plus the income from the premium. Since the Resistance is located around 1.10, selling the 1.10 Call could be an appropriate decision. Expiration Date Selection: The expiration date should reflect your market perspective and risk tolerance. Shorter-term options can provide more frequent income opportunities but require closer management. We will be using December 2024 in this educational idea. Premium: When selling a 1.10 Call using DEC24 expiration on Feb-21 2024, the premium collected would be between 0.02180 and 0.02280. The midpoint being 0.0223 and the contract size being USD 125,000, this means we would collect USD 2787.5 in premium, which would either add to the profit or subtract from risk. Step 3: Managing the Trade Monitoring Market Movements: Keep a vigilant eye on market trends and Euro Futures price movements. Be prepared to adjust your strategy in response to significant changes. Adjustment Strategies: If the market moves unfavorably, consider rolling out the option to a further expiration date or adjusting the strike price to manage risk effectively. Case Study: A Voyage on Euro Seas Let's illustrate this strategy with a hypothetical trader, Elena. Elena holds a long position in Euro Futures, expecting slight bullish momentum in the upcoming months. To capitalize on this and earn additional income, she sells call options with a strike price slightly above the current futures price, receiving an upfront premium. As the market progresses, two scenarios unfold: Bullish Outcome: The Euro strengthens, but not enough to reach the strike price. Elena retains her futures position, benefits from its appreciation, and keeps the premium from the call options. Bearish Downturn: The Euro weakens. The premium received provides a cushion against the loss in her futures position's value, mitigating her overall risk. Risk Management: Navigating Through Storms Implementing covered calls doesn't eliminate risk but redistributes it. Effective risk management is crucial: Use of Stop-Loss Orders: These can limit potential losses on the futures position if the market moves against your expectations. Position Sizing: Ensure your position size in Euro Futures aligns with your overall risk management strategy, avoiding overexposure to a single trade. Diversification: Consider diversifying your strategies and holdings beyond just Euro Futures and covered calls to mitigate systemic risks. Conclusion: Docking at Safe Harbors The covered call strategy, when applied to Euro Futures, offers traders an efficient way to navigate the forex futures market. By generating income through premiums and potentially benefiting from futures price movements, traders can strategically position themselves in varying market conditions. However, the journey doesn't end here. Continuous learning, market analysis, and strategy adjustments are paramount to sailing successfully in the dynamic waters of futures trading. As with all trading strategies, the covered call approach requires a balance of knowledge, risk management, and practical experience to master. Embarking on this voyage with Euro Futures and covered calls can lead to rewarding destinations, provided you navigate with caution, preparation, and an eye towards the horizon of market opportunities and challenges. When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies. General Disclaimer: The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
CME:6E1!Education
by traddictiv
2
The Wheel Options Strategy: 29 Things You MUST KnowI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Those of you who have been following me know I love trading The Wheel Strategy, in fact, with my $500,000 trading account that I’ve been trading on since mid-January, I just $50,000 in REALIZED profits for the year. The Wheel Options Trading Strategy is a powerful trading strategy that can be fairly low risk IF you know what you’re doing. This is why, in this article, I wanted to give you a complete squad of trading tactics for trading The Wheel Strategy. I look through all of the comments on my YouTube videos & the questions that I get in my live streams, and I have compiled a list of the questions I get most often. So today we’re going to talk about the 29 things you must know when trading the Wheel Options Strategy. The Wheel Strategy Overview So let’s briefly talk about the basics, and the basics of the Wheel Strategy, are actually pretty simple. So let me just tell you the three steps that we need to do when trading this strategy. Step Number One: We want to sell put options and collect premium. Step Number Two: Here, we may or may not get assigned. Step Number Three: If we are getting assigned we will sell covered call options and collect more premium. If we are not assigned, then we will just stay at Step Number One, and keep selling put options to collect more premium. So as you can see, it’s really not that complicated. I mean, wouldn’t you agree? Now I divided this into 3 sections: The Basics, then Picking The Right Stock, because there’s a lot of questions about this topic, and then we will also talk about Selling Calls After Getting Assigned, as well as What To Do When a Trade is in Trouble. The Basics 1.) I have around $30,000 in my Interactive Brokers account. Is it enough to start trading the Wheel? Here is my recommendation. You should have at least $10,000 in cash so that you can get $20,000 in margin. I highly recommend that you are trading a margin account. If you have less than $10,000 in cash, I do not recommend that you trade with the Wheel Strategy. Now, if you have a smaller account, I recommend that you do a maximum of three positions in your account. As your account grows, you can go up to five positions in the account. 2.) What is the best expiration date when selling options? What I personally like to do is go 1 to 2 weeks out, so this also means that I like to trade weekly options. So I’m looking for a really short fuze here because I believe that this is where you have the most control over the prices here. The idea is actually to collect so-called “weekly paychecks,” and I put this in quotation marks because it always sounds so glamorous, right? However, it’s really important that you know what you’re doing here. Now, the next question that I receive all the time. 3.) Should I use margin to increase my buying power? My answer to this is yes, absolutely. I highly recommend this, however, keep in mind that margin is a double-edged sword, which can work for you as well as against you. 4.) How do I know if I have enough capital if I get assigned? It’s easy. So let’s say that you are selling a 100 put, which means a put with the strike price of 100. This means that when you’re getting assigned you have to buy 100 shares at $100 each totaling $10,000, so this is how much capital you would need. So all you need to do is basically just take the strike price that you are selling of the put, times 100 because options come in 100 packs, and multiply this number by the number of options that you’re selling. Let me give you an example. I recently sold 8 put options of Apple at a 133 strike price. So how do you know whether you have enough money in your account? Well, this is where we are taking the strike price, 133 times 100, times 8. This means you would need to have $106,400 in your account. So please make sure that you are sizing your account appropriately. The good news is, if you do have the PowerX Optimizer, which is the tool that I’m using, it will show you exactly how many shares you can trade. So what you need to do here is that you are actually filling in your buying power, and again, your buying power might be different. How many positions you want to take, and this is where I said if you have a smaller account fill in three, if you have a larger account you want to fill in four or five. Then based on the strike price that you are selling here, it will tell you exactly how many options you should trade, and based on how many options it also tells you how much money you need, and how much margin is required if you were to get assigned. I highly, highly, highly recommend that you do use a tool, because you see, if you do all the math in your head, it can go horribly wrong. The tool that I personally use is the PowerX Optimizer. Many of you already have the tool, many of you are familiar with it. 5.) Is there a certain percentage you buy to close at? Some people say 50% profit is best statistically to close. I like to close a position at 90% of the max profits. So as an example, this morning (March 10, 2021) I sold puts on DKS, Dick’s Sporting Goods, and I sold them for $0.75. So this is where right now I have a working order in there to buy this back at $0.07, which is 90% of $0.75. So, yes, if I can get 90% of the max profit here, this is when I want to exit. 6.) So is there a rule of thumb of what percentage this account is tied up with the strategy? It really depends on how many trading strategies you use, right? So right now I trade two strategies. I trade the PowerX Strategy and The Wheel Strategy. The PowerX Strategy is perfect for a trending market, but the markets right now, are far from trending. They are super choppy going up and down, so, therefore, right now I’m dedicating all of my money in the account to the Wheel Strategy. Once I start trading the PowerX Strategy again, this is where I would just decrease the buying power here and say instead of using the $500,000, I might just use, let’s say 400K, and use 100k for the Wheel Strategy. 7.) What screening criteria does the PowerX Optimizer use for the Wheel Strategy? The PowerX Optimizer has a built-in scanner to find the best candidates for the Wheel Strategy, and there’s a conservative scanner as well as an aggressive scanner. For my criteria, we are looking for stocks between $5 and $300 here. We are also looking for stocks that have a down day because when you’re selling put to collect premium, you want to make sure that you’re selling when the market is going down. We are also looking at the implied volatility because want to make sure that there’s enough premium there. Then most importantly, we want to make sure that the annualized premium is actually at least above 30%. There are a few other minor criteria. First of all, we only look for stocks that have weekly options. This is what I explained briefly a little bit earlier, I’m not interested in trading stocks that only have monthly options. 8.) What can I expect? 30% yearly annualized based on what capital? The capital here this would be based on is the buying power. So in my account, I have a $500,000 buying power. This means if I’m looking for 30% based on the buying power, so this would yield into 60% based on the cash that I put in the account because the cash that I put in the account was $250,000. So when I’m talking about the 30% yearly annualized, it’s based on the buying power. If you don’t trade with margin, then this would be based on your cash. Picking The Right Stock: 9.) Do you have a defined universe of stocks that are your “good list?” Well, first of all, I want to make sure that I’m trading the stocks from the PowerX Optimizer Scanner, and then I just look for stocks that I like overall. These are some of the stocks I've traded thus far this year: There's been DBX, DKS, GDXJ, HAL, HAS, IBM, JWM, LL, MARA, MNST, NIO, RIDE, RIOT, SNAP, and many more others. These are stocks that I really like to trade, and as you see, most of them are very well-known names so I’m not trading any exotic stocks. You also will not find meme stocks like GME or AMC on this list here. 10.) Is there a certain level of IV, implied volatility, on a stock that you won’t go to? I’ve traded some 200% plus of IV is that too high? Just as a rule of thumb, the higher the IV the higher the risk. This means that now stock can really swing back and forth. So for me, what I feel is a sweet spot, I like to see at least 40% IV, but no more than 100%. Sometimes I do take trades that are higher than 100 but honestly, for me, the sweet spot where you find most trades that are fairly safe is anywhere between 60% to 80% implied volatility. This is where I don’t have hard rules here, but I need to like the stock. 11.) Markus, have you changed from your “When I started I just wanted to know the symbol. I did not want to know anything about the company, as it might cloud my view. Trade what you see, not what you think” mentality? My answer is NO, for the PowerX Strategy. I absolutely do not want to know anything about the symbol. However, for the Wheel Strategy, the answer is YES because when trading The Wheel Strategy I only want to trade super solid stocks. 12.) So I noticed that some of the stocks on your list for the Wheel have very illiquid weekly options. Do you watch for options liquidity or just the credit limit and hope to get filled? For me, I don’t care about open interest and volume, and here’s why. I am selling premium and I’m fine letting the option expire worthless, so I don’t need to buy it back. If I can buy it back I will, otherwise no. So this is where here I don’t care about the open interest. But again, it really depends on the strategy. I mean, if you’re trading a different strategy, open interest and volume might be very important to you. For me, it is not. 13.) Besides technical support/resistance levels, how do you objectively decide which are the best stocks? Do you take into account any fundamental analysis to filter out which underlying to trade? No. So here is what I do, and this is it’s pretty subjective, so I don’t have objective criteria here. I must like the company, because the point is, you must be OK owning this company, and I must like the story of the company. Yeah. This is where I always use Peleton as an example because I know that many are trading Peleton and it has lots of premium in there. But you see for me, Peleton, it’s a company that I believe can easily be ripped off, and at some point, a major competitor might swoop in. So I must like the company and the story of the company. This is fairly subjective here because the key is that you must be OK owning that stock at the strike price. 14.) Since you are suggesting not to sell puts on leveraged ETFs, why are they then included in the Wheel Scanner? You know what? This is a great question and we actually might exclude them in version PXO 2.0. So right now I thought you’re all adults, and as adults, you can do whatever you want. I did not want to restrict you, so but we might exclude it or, we might add an asterisk as a warning sign. It’s a good suggestion, and I know that some get blinded by premium on leveraged ETFs. So I do not trade leveraged ETFs, anything that has 2x or 3x in the description I stay away from this. 15.) Why do you select growth stocks only instead of a mix of value and growth stocks? Seems that growth is in trouble due to interest rates. Growth stocks offer attractive premiums, but value stocks rarely do. I want to give you a very specific example here, and let’s actually go to IBM, because IBM is one of the value stocks that I have traded. I traded IBM after a massive drop where I sold the 117 strike. Usually in IBM, you won’t find enough premium in there. The implied volatility lately, is usually around 34 or 29. So this is the very simple reason why I’m going for growth stocks because I’m looking for a minimum of 30% annualized in premium. Selling Calls After Getting Assigned 16.) If you sell a call lower than your original put strike price can you still make money? This is actually super dangerous, and here’s why. So when you sold a put you got assigned, and you had to buy stocks at the strike price. I’m using an example of AAPL, and I was assigned Apple at $133 per share. Now, if I’m now selling a call, it means that I have to sell stocks at the strike price, so if I’m selling, let’s say a 125 call, it means that I have to sell the shares for $125. Now here’s the challenge with this. I bought them for $133 and now I’m selling them right now for $125. This means that I’m losing $8 per share. Now when you’re trading options, they come in 100 packs. So this means that you would lose $800 per option. So this is where you need to be careful when you’re selling a call lower than your original strike price. If you do this, make sure that it is above your cost basis, and we’ll talk about the cost basis here in just a moment. 17.) Why are covered calls more profitable in your experience than cash-secured puts? Are you targeting a different percentage return? No, I do not. Here’s a rule of thumb for what I do. Let’s jump to PowerX Optimizer and go to the Wheel Income Calculator. Here is something that I did today (March 10, 2021) where I sold calls on RIDE. Yes, and let me, let me quickly double-check before I do this, what did I sell on RIDE? So on RIDE I sold calls that expire March 19th, and I sold them for $0.35, and the calls that I sold were at 23. So by doing this, this actually gave me an annualized return. By default, I am not going as many strikes out, because all I need here right now is a rise in 7%. So if you are rising seven percent here, then I will be able to make money not only on the premium that I collected, the 16.45, but also an additional $7,000 on the stock, right? So this will be a total of $8,500. It’s just the nature of the beast because when you are selling calls you’re usually closer to the strike price, and therefore, usually higher premium for a higher ROI. This is why I keep telling you, I’m always looking forward to getting assigned because selling calls is actually more profitable. 18.) When you sell calls to reduce the cost basis, do you also include the premium received from selling first the put to reduce the cost basis? Yes, I do include the premium. 19.) Is there a risk of the portfolio becoming nothing but stocks and not being able to sell covered calls out of the money (OTM) to hit your targets? The answer to this is absolutely yes. When trading there’s risk, and there is a possibility that you own a bunch of stocks and you cannot sell calls against. So you have to hold on to these, and so for a few weeks, it could absolutely happen that you’re not making any money. I was recently assigned shares of AAPL, and have not been making any money with them because I have not been able to sell calls. But you see, even though I have one dud in my account, it’s only one of my positions, and I still have been able to make almost $51,000 in about 8 or 9 weeks. So, therefore, it’ll even out. So is there a risk? Absolutely. When trading there is always risk. If you are not willing to accept the risk when trading, do not trade, because there’s always the risk of losing money. 20.) Markus, if you haven’t sold a call against the Apple 103 strike price haven’t you been missing out on money? Not really, and here’s why. Right now, if I would try to sell a 133 call on Apple, that is, for example, expiring this week, I would get $0.01. I’m not missing out on any money, right? $0.01 translates into $1. So, no, I’m not missing out. Even if I would go out next week and I’m looking at the 133, I would only get $0.14. That’s $14. For me, it’s not worth it, and again, everybody’s different, so you might have different rules. For me, however, it’s not really worth it. 21.) When running a rescue mission on margin, how does one sell a covered call? My broker requires cash for any call that I sell. If this is true, change the broker immediately, and here’s why. So I own Apple shares, and if right now I want to sell calls against these Apple shares, let’s say 8 calls, it would not have any effect on my buying power. It’s the opposite So here I highly recommend you change the broker if this is true. Your margin requirements should be reduced when selling a covered call, this is how it works. 22.) Why not still sell calls at your cost basis after the stock drops? Because sometimes there’s not enough premium. If there is enough premium, I will do it, but sometimes there is simply not enough premium and then you are sitting on your hands. This is why I said I have this, the one dud in my account, AAPL, is not making me any money, but everything else IS making me money. I was able to sell calls against GDXJ and RIDE. With DKS, MARA, and SNAP, I sold puts. So everything else is making me money. I mean can’t change the wind, I can only adjust my sails and this is what I’m doing here. What To Do When A Trade Is In Trouble 23.) What do you mean by “rescue mission” for those who have not heard it before? But a “rescue mission” is where you have been assigned shares, and now the trade is going against you. You sell more put options below the assigned strike price. By doing this you collect more premium. If you are assigned, you lower your cost basis, making it easier to get out of that trade. You only should consider flying a “rescue mission” if the stock is down at least 30% from your assigned price. 24.) Why not still sell calls after your stock drops? Because there might not be enough premium in there. So very simple, right? If there is, we will do it, if not like with AAPL for me right now, then it is what it is. 25.) What happens when you run out of buying power and can’t sell calls at your target? So first of all, you can always sell covered calls, because you will not run out of buying power for selling covered calls. What they probably meant is what about not being able to sell puts, and there are two things that you can do. Number one, you can either wire more money into your account, which is probably not always feasible. Number two, you can simply close some positions to free up some buying power. 26.) Is it possible to buy options rather than sell options because selling options is supposed to be very dangerous? Well, of course, and that would be the PowerX Strategy. So with the PowerX Strategy, you are buying options if this is what you prefer to do, and if you’re trading the Wheel Strategy, this is where you’re selling options. So pick your poison. I mean, you got to do one thing, either you’re buying options or you’re selling options. So I have a strategy for each of these. 27.) Any point in waiting to make sure that the market has stopped dropping before flying a rescue mission? Yes! You don’t want to try to catch a falling knife. Wait until you see that the market or the stock is stabilizing here. 28.) I understand starting the rescue mission when the stock drops 30%, how do you determine the new put strike price to enter? The next support level? Yes, absolutely. This would be the next support level that you’re looking at. I got assigned at 21.50, and the next possible support level is right around 12,13, so this here it would be a strike price of 12–13, so this is where I would do it. If we go to Apple, which is another stock that I have, I did get assigned here at 133 and the next support level is around 108, right? So I would probably be most interested in selling the 108 strike price. 29.) It’s hard to make money on a small account unless you get assigned. Yes, it is hard to make money on a small account, period. I know that many want to start with a smaller account, like $500 or $1,000, but honestly, it is super, super, super difficult to make money on such a small account. In order to do this, you would have to trade this account way more aggressively, which means that you are basically risking a whole lot. So if you want to try to double a $500 account, you basically have to risk the full $500. This is what many Robinhood traders and these YOLO’ers do. It’s all-in and maybe it doubles or you lose all of the money. So, yes, it is absolutely difficult. So this is why the capital requirements, I highly recommend that for the PowerX Strategy if you want to trade it, that you have at least $5,000, and if you want to trade the Wheel Strategy, that you should have at least $10,000 in cash, which gives you $20,000 in buying power we talked about this at the beginning of the show here. So this is super important. If you do have smaller accounts, there might be trading strategies for you. I want to be honest with you though if there are, I don’t know them. When I started trading, I started with an $8,000 account and I saved until I had $8,000. Now, I shredded that account into pieces, down to $1,600 and then I saved money up again. Then the second account that I was trading was $16,000. Now that one, I also lost more than half. So I lost, I traded this down to $8,000 and this is when I put some more money in, brought this up to $12,000, and this is when it finally clicked. So again, if right now you have a smaller account, good luck, there might be strategies out there. I wish I had some for you. I promise, if I knew how to grow a $500 account I would tell you. If right now, if all I had to trade was with $500 to trade, I wouldn’t do it. I would probably find a way to save money or make extra money with Door Dash, Insta Cart, or something like this until I have at least $5,000. I wish that I could tell you something different, and unfortunately, I can’t. I’m not saying that it is impossible. All I’m saying is that I’m not the right person to teach you these strategies because I don’t know them. Summary If I didn’t cover a question here in this article that you may have, I promise I’m reading through all of the questions that you have, and I will answer them in one of the upcoming Coffee with Markus episodes. I hope that you enjoyed this article because I love talking about trading. Anyhow. Have a fantastic rest of your day and I’ll see you on the next one.
TVC:NDQEducation
by rockwelltrading
Trading The Wheel Options Strategy — 3 Reasons Why You’d Lose MoI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. So, as you know, I love trading the wheel options trading strategy, and this past week was a roller coaster for this strategy. Friday morning I woke up and my account was down $25,000. Now I’ve been trading a larger account. It’s two hundred fifty thousand dollars in cash, five hundred thousand dollars in margin, so $25,000 is not that much, but still. So in this article, we are going to talk about the Wheel Options Strategy. We will talk about the three reasons why you would possibly lose money with this strategy and also how to avoid these mistakes. So here we'll talk about my account. As you know, this show is about real money and real trades, and at the time of this writing, I am still down about eighteen thousand dollars. So it has gotten a little bit better since this morning, but down eighteen thousand dollars. So we’ll take a look at these trades in detail. But first of all, let’s talk about the three reasons why you would lose money with this strategy and then also how to avoid them. 3 Reasons You Would Lose Money So there are three big mistakes that you can make when trading The Wheel strategy. So the first is panicking. If you are somehow trapped in a position and you say, what the heck do I do now? I often see traders who say, “What do I do now?” So solution number one is don’t panic. Easier said than done, right? But not panicking is so important. This is what one of our members posted in our community. “It’s not a loss if you don’t sell.” so the worst thing that you can do going back to this is panicking and closing your positions at a loss. Don’t do this. Don’t close your positions, & evaluate what’s happening. The second mistake is not having a plan. Mistake number three is not having the right trading tools. So, now I will go through my positions that I had and then I will show you how I handled them with my plan. Then we will also talk about the third mistake in more detail, and then some more solutions. My Positions So five positions that I had in my account were (On February 26, 2021): AAPL AMD DBX GDXJ RIDE So let’s start with AMD first. If AMD were to stay above 83.50 until the remainder of the trading session (at the close that day), I’d make money. Everything that happens with my positions, I write this down, and I recommend you do the same thing so that you know of what’s happening to your positions. You will know which ones are actually in trouble and which ones are good to go. So if AMD closed above 83.50 nothing would happen, and I would keep the whole premium. For this trade, this was $576 in premium for the week. Not bad at all. The second position is DBX which is Dropbox. So Dropbox needs to stay above 21.50 and it was trading at 22.85. So it seemed that we were pretty good there. You might be wondering why I am talking about the positions that are OK? You see, in order to stay calm and to make sure that you’re not panicking, focus on the positive first. I know if you’re taking a hammer and you smack one of your fingers, what do you focus on? The finger that hurts. Right? But you have four other fingers that are absolutely fine. So it’s important to focus on what’s going right for us. So if DBX stays above 21.50, which is very likely. So I sold 47 of these options for $13 totaling $611 in premium, so not bad at all. So what’s happening with GDXJ? So the week prior I got assigned because it expired below my strike price. So I got assigned 2,100 shares at $48. Now, here’s what I did with this. So let’s forget these shares for just a moment and let’s again focus on the positive of what’s working well for it. I sold covered calls at the 49 strike price, and I collected premium. So how much premium did I collect for these calls? I sold 21 contracts for $75 each. So I collected for this trade, $1,575 in premium. So we are OK there, and I still have the shares, because they expired worthless. So the next position is RIDE. So if it stays above 21.50 I just collect the premium and nothing else happened, but the price stayed below. I got assigned 4,700 shares at $21.50 so this position is in trouble, we will deal with that at some point, but here’s the good news. I still collected $1,974 in premium. So the last position here is AAPL, and I did get assigned these shares a week prior. So I have 800 shares and I’ve not been able to sell any calls against it. So here I have 800 shares at 133, and also these shares are in trouble because Apple right now is trading at $124. So I got assigned and now AAPL is down. Not good. I still collected all this premium and it all added up. So because overall, it was a pretty darn good week, collecting $4,736 overall. I don’t know about you, but this is not bad at all. And I know you might be saying, “oh my gosh, you’re talking about making some money here, but what about all of these red positions?” Why You Shouldn’t Worry About Being Assigned We’ll take a look at these starting with RIDE This is where it goes back to what is the worst thing that you can do? Panicking. Like if I were to sell for example. If I would sell these shares instead of collecting the premium that I have here, I wouldn’t have made any money on RIDE, I would have lost $8,272 instead. I don’t know about you, but I would rather keep the premium of $1,974 instead of losing $8,272. For me personally, I will not worry about it. So here is where it goes back to. What do we do? Follow your plan. So you got to follow your plan, and this point I’m about to make is very important. I’m actually excited to get assigned, and in a moment you will see why. Your reaction should be, “Yes! I am assigned because I want to own the stock.” I’m really, really happy about this. I’m happy about having stocks. Or your reaction might be this where you say, “oh my gosh, what have I done?” If this is your reaction, then you violated the number one rule of “The Wheel Club,” and here’s the number one rule of the wheel club: "Don’t sell puts on stocks that you don’t want to own". OK, wrong movie, but you get the idea right? So let’s take another look at my positions. Am I happy to own AAPL stocks? Yes, I am. Am I happy to own GDXJ and RIDE? Yes! Would I have been happy to own AMD stocks if I was assigned? Of course! Absolutely! OK, so let’s take a look here at the stocks that I’ve traded thus far year to date. And as you can see, my profits year to date, around $43,000. Take a look at all the stocks. These are the stocks that I would not mind owning at all, and this is really the number one rule of The Whale Club. So Apple, AMD, DBX, GDXJ, HAS, IBM, LL, WYNN, ect. All of these are good, solid stocks that I wouldn’t mind owning. So let’s talk about what do we do with RIDE. Why am I so excited to own it? This is where it goes back to having a plan. So my plan is just to follow The Wheel strategy, and this means that after assignment, I will sell covered calls and collect premium. Very, very easy. This is where we go back to mistake number three, not having the right tools. I use the PowerX Optimizer and I will show you right now how to use it and why it is so important. So PowerX Optimizer supports two separate strategies. The PowerX strategy as well as The Wheel strategy and part of the PowerX Optimizer is the real income calculator. I set my buying power to $500,000 because that is the buying power that I have in the account. So the stock I want to use as an example is RIDE. Let’s plug in some numbers and see what our premium is on this one for if I get assigned these shares, and start selling calls. So getting assigned 4,700 shares at 21.50. Now, the option strike price that I’d try to sell would have to be at the price that I bought at or above. The last traded price was $0.43, so let’s assume we’re selling the shares at that same price. So I’m using the strike price here of 21.50 and I’m selling calls for $0.43. If I did this I would get $2,021 in premium! Wholly Cannoli, are you getting excited about this? I’m excited about this. Now you see why I’m excited to get assigned. If you add this with the premium I’ve already collected on RIDE from selling puts, which was $1,974, that’s almost $4,000. You get the idea right? So I would not make any money on the stock but that is OK. So is this stock really in trouble if I make 4000 dollars in two weeks? I don’t think so. So one trade that I had last week that wasn’t doing so well was AAPL. I got a signed AAPL at 133, so I need to see if I would get enough premium to sell calls. This is why it is so important & I can’t even stress this enough, how important it is to have the right tools. Having the right tools help you make the best decisions instead of panicking. Back to AAPL, I was assigned 800 shares at $133. How much premium could we get for selling calls? So right now, if we sell calls with expiration for the end of this week, at the 133 strike price, we would only get about $0.13, and I would only make about $104 which is nothing. So out of all these positions, Apple is the only one that right now is kind of in trouble because I not yet able to get enough premium when trying to sell calls, but that is OK. All I need to do is just be patient and wait until AAPL goes up. Summary In the meantime, I do believe that Apple is a solid company, and I don’t mind owning the shares. This is where we go back to rule number one of The Wheel Club. “Don’t sell puts on stocks you don’t want to own” because if you do this, then you probably sitting there today, like, what have I done? But I hope this helps you see how to deal with being assigned and that you also see, how to handle things when a trade is in “trouble.” Just sell covered calls, and collect premium. If there isn’t enough premium available to sell calls, just wait until it bounces back, it’s really not a big deal. I am absolutely OK making $4,736 last week with the potential to make another $3,000 this week. Not bad at all, as you know. My goal is to make $15,000 per month. If I can make $7,000-$8,000 in two weeks. I’m well on my way.
NASDAQ:AAPLEducation
by rockwelltrading
1
The Poor Man’s Covered Call ExplainedWhat Is The Poor Man’s Covered Call? Questions we’ll answer in this discussion: - What is it? - Who is it for? - When to use it? The Poor Man’s Covered Call is a very specific type of spread. As you know, we’ve been covering option spreads for several Coffee With Markus Sessions. We’ve also covered the Covered Call’s strategy in-depth on our YouTube Channel. In this article, we’re discussing the difference between trading stocks, covered calls, and the Poor Man’s Covered Call. Trading Stocks Let’s take a look at trading stocks first. Let’s say that you’re bullish on a stock like Boeing BA . If you were bullish on this stock, you might purchase a decent amount of stock, let’s say 100 shares. At the time of the original writing of this article, this stock’s strike price was $180. If you purchased 100 shares of BA , at $180 dollars each, this would require $18,000 in purchasing power. If the stock increases by $10, to $190, you stand to earn $1,000 in net profit. So you’ve risked $18,000 to earn $1,000. If the stock price increases to $200, you’ll earn $2,000 and so on. This is pretty basic and you probably understand this concept. A profit picture is a sliding scale that moves to the right as the stock price increased. It is a visual representation of your profits. or losses depending on the movement of the stock. In this example, the price of the stock is increasing so the scale is moving to the right. Selling Covered Calls In this example, let’s say that you’re still bullish on BA . And in the short term, you expect an upward movement in price. Since you already own the 100 shares of BA stock, you can sell a $200 Call Option against these shares (again, this is based on the price of BA at the time of writing this article). If the stock price increases to $190 like you expect, you’ll earn an additional $450 on top of the $1,000 you’ve already earned. If we see a decrease in stock price, the covered call acts as a hedge. In this example, if we saw a downward movement to $170 you would lose $1,000. But because you sold a $200 Call option contract and received a premium of $450, your net loss would only be $550. Covered Calls VS Poor Man’s Covered Call Poor Man’s Covered Call When would you trade a Poor Man’s Covered Call? That’s easy! When you don’t have the $18,000 to buy 100 BA shares! And When do you trade a covered call? When you expect the stock to stay above the current price and move slightly higher. Instead of buying a stock, you would purchase a deep in the money call option at a later expiration. When looking for a call option deeper in the money, we’re trying to find one with a Delta of 0.95. his means for every dollar the stock moves, the call option is gaining .95 cents in value. Deep “In The Money” Calls For this example, We’re buying a deep ITM call at $71 which means the capital required to take this position is only $7,100. As you can see this is a fraction of the price to purchase the stock outright. At the same time, we will sell the $200 Call option. Similar to the covered call. But instead of owning the stock at a price of $18,000, we purchased the ITM call option and sold a $200 call option. if the underlying stock price moves from $180 to $190 you would make $1335 because the Delta is 0.95, which means it’s only increasing 95% of the value. The profit on this type of position isn’t as high as a covered call, but it’s much more than owning the stock outright, with much less risk and less capital. This sounds too good to be true right? The perfect strategy! BUT… there’s a downside associated with this strategy. Your profit is limited. If you see a huge movement in the underlying stock, you’ll only benefit from a portion of the total gains. In this example, if the underlying strike price gained $40, the stockholder would earn $4,000. The covered call would earn $2450, and the Poor Man’s Covered Call would earn $2,320. Many traders use this strategy because of the limited capital involved with taking on a position, and the limited risk associated with a potential downward movement of this stock.
NYSE:BAEducation
by rockwelltrading
2
Covered Calls For BeginnersI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Covered Call For Beginners For good reason, the covered call strategy is one of the first option strategies that new traders start trading. This is an effective strategy that options traders often use to provide income on stocks they already own. Questions to be considered in this article: - What Is A Covered Call? - Should You Trade It? - Specific Example Can You Do It In A Retirement Account, EG, IRA? What Is A Covered Call? A covered call is an options strategy used traders to produce income on stocks on long stocks held in their portfolio. This strategy is used by traders who believe that stock prices are unlikely to rise in the short term. A covered call strategy is defined as holding a long position in stock while simultaneously selling a call option on that same asset. This strategy can provide income to a trader who is long term bullish on stocks but doesn’t believe there will be a significant increase in price immediately. A covered call will limit a trader’s potential upside profit if there is a significant move in the price of the stock upwards. This strategy provides little to no protection if the asset price moves downwards. Covered Call Example For the specific example that we’re going to cover today, we’ll take a look at JP Morgan JPM . The price information reflects the price of JPM back in July at the original time of writing for this guide but is just being used as an example If you were holding JPM stock in your portfolio before the pandemic, chances are that you are currently underwater. DISCLAIMER ***For the purpose of full transparency, I do not own or hold any JPM stocks*** I typically only hold stocks between 5 and 25 days. Stock Price Movement Recap For this example, we’re going to assume that I own 100 shares of JPM . If I were to purchase 100 shares for $96 it would mean that the capital requirement for this position is $9600. You’re probably familiar with the way profits move in relation to stock prices… but just to be safe: - If the stock increased to $106, or $10, I would earn $1000. - If the stock increased to $116, or $20, I would earn $2000. - If the stock decreased to $86, or -$10, I would lose $-1000. How Does A Covered Call Work? Sell one call option contract for every 100 shares of the underlying stock in your portfolio. The contract selected would ideally have a short expiration date of 7 days. You would choose an “out of the money” call at a higher strike than the current price of the stock. When choosing this strike price, you would typically choose a price at least one standard deviation away from the current strike price. In other words, choosing a strike price that you do not believe the current strike price will exceed before the date of expiration. If you’d like to learn more about this options strategy, or options in general, I have an awesome Options 101 Course. What’s the benefit of having a Covered Call for the stocks in my portfolio? It’s simple really. When you sell a call option contract, you will receive a premium. This strategy generates income when you don’t expect to profit from the movement of the underlying stock price. In this example with JPM , I received a premium of $55 for selling a call option contract at the price of $116. Provided that the underlying strike price does not move above $116, the contract will expire worthlessly and I will keep the premium I collected by selling the options contract. Let’s take a look at how a covered call will affect your portfolio with the same stock movements. - If the stock increased to $106, or moves $10, I would earn $1000 plus the $55 - If the stock increased to $116, or moves $20, I would earn $2000 plus the 55 - If the stock decreased to $86, or moves -$10, I would lose $-1000 but keep the $55 for a total loss of -$945 Why does this work? If you take the entire amount of premium you received and divide it by the number of days between no and contract expiration, you come up with a number like this: $55 dollars in 7 = $8(ish) per day. This covered call contract is paying us $8 dollars per day. If you take the $8 dollars, divide that by your total capital investment of $9,600 it equals 0.08%. This may not sound too incredible, but… If we do some basic arithmetic and take 0.08% and multiply that by 360 trading days per year, you end up with a return of over 30%. This is in addition to what you earned from the growth of the stock. On some stocks, it’s possible to earn upwards of $20 per day. This could increase annual returns in excess of 40% to 50% Does this sound a little more exciting? YES! Should you trade it? ABSOLUTELY! BUT…. There is a risk associated with this strategy. If there is a large movement of the underlying stock price that surpasses the strike price of your call option contract, you will be forced to sell your shares at this price. This would limit your upside potential to the difference between the current stock price and the price of the call option contract. Example: If the price of the stock went up to $117 (past the $116 call option) and the options contract expires, your stocks will be sold $117. This means you would earn $1,100 + $55, or $1,155. In other words, you would lose $100 for every $1 the strike priced moved above your call option contract. The silver lining is that you can probably buy your stock back the next day if you wanted to hold them long term. This type of trade can be taken inside of your retirement account such as an IRA, which provides you with another way to grow your account conservatively.
NYSE:JPMEducation
by rockwelltrading
TUTORIAL: BUYING POWER EFFICIENT CC OVERWRITINGLet's face it. Being in a net delta long covered call in a market downturn can blow. Typically, the vast majority of covered calls are 70-80 net deltas long per one lot, depending on how aggressive your are with your short calls. There are a number of solutions to cutting that net delta to something more tolerable: (a) sell calls; (b) sell short call verticals/diagonals; (c) buy long put verticals/diagonals; or (d) drive your short calls to at-the-money or into-the-money. This post discusses overwriting your covered calls with short call diagonals. While selling calls against is the most straightforward of approaches, many brokers won't allow naked call selling, particularly in cash secured environments like IRAs. Moreover, selling naked against may not be the most buying power efficient of approaches. The short call diagonal not only provides a work-around to the "no naked call" prohibition, it may also afford some buying power relief over going naked. Pictured here is a laddered, short call diagonal, overwrite setup (say that quick three times) in the September, December, and March expiries of SPY with the short options camped out at their respective 20 delta strikes, the longs at "cheap." It pays 6.31 in credit, has a theta of 5.49, and is -53.77 delta. It's naturally applicable to any underlying and can be modified to afford you the amount of overwrite/delta-cutting that you want, even where you're not in a one lot.* You can naturally also just ladder out short call verticals with the short legs at the 20's and the longs at "cheap"; my preference, however, is for getting into the longs once so that I can work the calls as though they were naked if they have to be managed, as opposed to managing a spread. Moreover, I can leave the longs alone throughout the life of the setup and re-use them even if they're no bid as buying power effect cutters, thus saving a bit on fees, since I'm only in and out of a single contract, as opposed to two, as I would be with a spread. As usual, there are pluses and minuses to the setup. The pluses: (1) it flattens net delta, thus smoothing out your P & L in a downturn; (2) it provides additional cost basis reduction on top of any dividends you might be receiving by being in shares and/or with the short calls you've already got covering your shares. The minuses: (1) It ties up buying power to the extent of the width between the short call and long call strikes minus any credit received; (2) the additional short calls have to be managed if tested. * -- For example, the pictured setup would flatten the net delta of a 53 share SPY position to virtually flat, since 53 shares of SPY are 53 delta long and the setup is 53.77 short.
AMEX:SPYEducation
by NaughtyPines