Covered Calls - AMAZING Option Trading Strategy - New Twist!
Summary
TLDRThis video introduces the 'Poor Man's Covered Call', an efficient strategy for stock and option traders with limited capital. It involves buying a deep in-the-money call option instead of actual shares, reducing upfront costs while still capturing most of the stock's price appreciation. The strategy is explained through an example using AMD stock, demonstrating how this approach can yield a higher return on investment with less risk compared to traditional covered calls.
Takeaways
- đ The 'Poor Man's Covered Call' is an option trading strategy that allows traders to efficiently use their cash and potentially get a better return on investment with less upfront capital.
- đ€ Traditional covered calls involve owning at least 100 shares of stock and selling a call option against those shares to generate income and set a potential sell point.
- đĄ The strategy is called the 'Poor Man's Covered Call' because it substitutes the need to own 100 shares of stock with a deep in-the-money call option, which is significantly cheaper.
- đ° By purchasing a deep in-the-money call option with a high Delta (at least 90%), traders can capture almost all of the price appreciation of the stock with less upfront investment.
- đ If the stock price doesn't rise to the strike price of the sold call option, the trader keeps the premium received from selling the call and can roll over to another call option contract.
- đ The deep in-the-money call option acts similarly to owning the stock itself but at a fraction of the cost, reducing the risk of a large upfront investment.
- đ The potential downside of this strategy is that if the stock price rises significantly, the profit from the call option may be less than if the trader had owned the actual shares.
- 𧟠The return on investment (ROI) is calculated by dividing the gain from the trade by the initial investment, which in the case of the 'Poor Man's Covered Call' can be significantly higher than traditional covered calls.
- đ The script provides an example using AMD stock to illustrate the differences in cost, potential gain, and ROI between traditional covered calls and the 'Poor Man's Covered Call'.
- đ The presenter encourages viewers to learn more about options trading and offers resources such as a free 'Put Selling Basics' ebook and webinars for further education.
- đ The video description contains links to recommended books, brokers, and other resources for those interested in enhancing their options trading knowledge and skills.
Q & A
What is a covered call strategy?
-A covered call strategy is an options trading strategy where an investor holds a long position in an asset and sells call options on the same asset to generate income. It sets a potential sell point for the stocks in the investor's account.
What is the 'poor man's covered call' strategy?
-The 'poor man's covered call' is a variation of the covered call strategy where instead of owning 100 shares of stock, an investor buys a deep in-the-money call option to simulate the stock ownership, which requires less capital upfront.
Why is the strategy called the 'poor man's covered call'?
-It's called the 'poor man's covered call' because it allows investors to use less capital to gain exposure to the stock, similar to owning the shares, but at a lower cost.
How does the 'poor man's covered call' differ from traditional covered calls?
-In a traditional covered call, an investor must own 100 shares of stock and then sell a call option against those shares. In the 'poor man's covered call', the investor buys a deep in-the-money call option instead of purchasing the shares, and then sells another call option to create the covered call position.
What is the role of the Delta in the 'poor man's covered call' strategy?
-The Delta indicates how much the option price will move in conjunction with the stock price. For the 'poor man's covered call', a deep in-the-money call option with a Delta of at least 90% is preferred, ensuring that the option price will move almost in lockstep with the stock price.
Why would an investor choose a deep in-the-money call option for the 'poor man's covered call'?
-A deep in-the-money call option is chosen because it behaves similarly to the stock itself but costs significantly less than buying the actual stock, thus requiring less capital and reducing the upfront cost.
What is the potential downside of using the 'poor man's covered call' strategy?
-The potential downside is that if the stock price rises significantly above the strike price of the call option sold, the investor may be obligated to sell their shares (or in this case, the equivalent position through the call option) at a lower price than the market value, thus missing out on additional gains.
How does the 'poor man's covered call' strategy impact the investor's return on investment (ROI)?
-The 'poor man's covered call' can offer a higher ROI compared to traditional covered calls because it requires less capital upfront, increasing the percentage return based on the lower initial investment.
Can the 'poor man's covered call' be used for long-term stock holding?
-Yes, the strategy can be used for long-term stock holding by choosing a call option with a longer expiration date and rolling the sold call options as they expire.
What happens if the stock price does not rise above the strike price of the sold call option?
-If the stock price does not rise above the strike price, the sold call option will expire worthless, allowing the investor to keep the premium received from selling the call and potentially sell another call option for a later expiration date.
How can an investor manage the risk associated with the 'poor man's covered call'?
-An investor can manage risk by carefully selecting the strike price and expiration date of the call options, monitoring the Delta of the purchased deep in-the-money call option, and rolling the call options strategically.
Outlines
đ Introduction to the Poor Man's Covered Call Strategy
This paragraph introduces a stock trading strategy known as the 'poor man's covered call,' which is designed to maximize the use of cash and minimize upfront costs for traders interested in covered calls. The strategy involves selling call options to generate income and set potential sell points for stocks, but instead of owning 100 shares of stock, a deep in-the-money call option is purchased to simulate the stock ownership. The video promises to explain how this approach can offer a better return on investment and how it compares to traditional covered call selling.
đĄ Understanding the Poor Man's Covered Call as an Option Spread
The speaker explains the mechanics of the poor man's covered call, which involves buying a deep in-the-money call option and selling another call option at a different strike price to create an option spread. This approach is cost-effective as the deep in-the-money call option acts similarly to owning the stock but at a fraction of the price. The paragraph delves into the concept of Delta, which indicates how much the option price will move with the stock price, and emphasizes the importance of a high Delta for the deep in-the-money call option.
đ» Example Comparison: Traditional vs. Poor Man's Covered Call
The paragraph provides a detailed example using AMD stock to compare the traditional covered call strategy with the poor man's covered call. It outlines the costs and potential returns of both strategies, highlighting the significant upfront cash savings and higher return on investment achievable with the poor man's covered call. The example illustrates the calculations involved in determining the effective selling point, profit, and return on investment for each strategy.
đ Enhancing Returns with the Deep In-The-Money Call Option
This section further explores the benefits of using a deep in-the-money call option instead of purchasing actual shares. It explains how the cost basis for the call option is determined and how the strategy can lead to a substantial increase in return on investment. The paragraph also discusses the risk reduction aspect of the poor man's covered call, as it requires less upfront capital, thus lowering the potential loss if the stock price declines.
đ Maximizing Efficiency with the Poor Man's Covered Call
The final paragraph wraps up the video by emphasizing the efficiency of using options contracts over stocks, as demonstrated by the poor man's covered call strategy. It suggests that the saved capital can be invested elsewhere to generate additional income. The speaker also promotes the Smart Option Seller website, offering resources such as a free 'Put Selling Basics' ebook and a webinar for those interested in learning more about options trading. The paragraph concludes with a call to action for viewers to engage with the content and reach out for further assistance.
Mindmap
Keywords
đĄStock Trader
đĄCovered Call
đĄPoor Man's Covered Call
đĄOption Premium
đĄCall Option Contract
đĄDeep In-The-Money (ITM) Call Option
đĄDelta
đĄOption Spread
đĄCost Basis
đĄReturn on Investment (ROI)
đĄRisk Management
Highlights
Introduction to the 'Poor Man's Covered Call' strategy for stock and option traders.
Efficient use of cash and reduced upfront cost with the 'Poor Man's Covered Call'.
Traditional covered calls explained, including the income generation and potential sell point setting.
How selling a covered call obligates the seller to potentially sell shares at a higher price.
The option premium as upfront cash payment for selling a call option.
Covered call strategy for creating a cash flow and setting future sell points.
The concept of rolling covered calls to maintain share ownership.
The 'Buy Right' strategy for those without 100 shares, combining stock purchase and call selling.
Explanation of the 'Poor Man's Covered Call' using a deep in-the-money call option instead of actual stock.
Deep in-the-money call options act similarly to the stock with significantly lower cost.
Importance of Delta in options trading and how it relates to the movement of the stock price.
Example of AMD stock to illustrate the traditional covered call versus the 'Poor Man's Covered Call'.
Cost comparison between buying 100 shares of stock and buying a deep in-the-money call option.
Calculating the return on investment (ROI) for both traditional and 'Poor Man's Covered Call' strategies.
Risk reduction and increased ROI with the 'Poor Man's Covered Call' strategy.
Strategic use of the saved upfront cash for other investments or savings.
The option to roll the options for extended periods to continue the 'Poor Man's Covered Call' strategy.
Final thoughts on the benefits of the 'Poor Man's Covered Call' for efficient capital use and risk management.
Transcripts
hey if you're a stock or option Trader
and you want to get into doing covered
calls which we've talked about in the
past I'm going to show you a way to use
the covered call more efficiently use
your cash more efficiently spend less
money up front get better return on your
investment it's called the poor man's
covered call so if You' never heard
about it you might want to stick around
and watch this video because it's kind
of an eye-opening way to perform the
covered call strategy so if you want to
learn how to use the strategy stick
around and watch this video and let's
go all right everyone Lelo here from
smart option cell.com trying to help the
community here the trading Community
making these free videos so what we're
talking about today is the smart option
seller Guide to the poor man's covered
call so if you're interested in selling
covered calls you're going to want to
watch this video because because it will
provide you a a different way to use
options with the covered call strategy
now for those of you that might know
selling a covered call is all about
getting some income into your account
and setting a potential sell point for
stocks that you have in your account so
let's just quickly go over what selling
a covered call is all about and then
we'll dive into the strategy of how to
use the poor man's coverboard call so
for those in the know or maybe you don't
know if you have aund at least 100
shares of stock in your account you can
sell one call option contract against
those 100 shares what does that do for
you
well let's just say you bought some
shares at whatever price and and in the
future you're looking to potentially
sell those shares what you can do is by
selling a single call option contract
what you're doing is obligating yourself
to sometime in the future potentially
selling your shares at a higher price
than where you purchase those sh shares
and by selling the call option contract
you're going to be paid cash up front
because someone is willing to pay to
take your shares away from you sometime
in the future and in order to take those
shares away from you they're willing to
pay you some money up front that's
called the option premium so let's just
say you bought a stock at 100 and you're
looking to sell the shares at$ 120 you
can sell $120 strike call option and
what that does is it enters you into an
obligation to sell your shares at 120 if
the stock in fact Rises to 120 above
sometime in the future and if it does
rise to 120 above then you sell your
shares at 120 and you lock in your $20
per share gain plus the money that the
call option buyer paid you up front so a
lot of people use sell and covered calls
as a way to you know create some current
cash flow and to sell and to place a
potential sell point in the future for
your shares but a lot of people don't
actually want to sell their shares they
want to hold on to their shares forever
so they'll sell a call option at a
strike that's way way up high where the
stock really has no chance of getting to
and if the and if the stock doesn't rise
that far the option contract will expire
you get to keep your shares you get to
keep the money that the call option
buyer paid you up front and now you can
sell another call option for another
expiration down the road so what a lot
of people like to do is they like to
just keep rolling their covered calls
throughout the year hoping that the
stock doesn't rise up to the price where
they have to relinquish their shares so
actually you can do that and and it's
worked pretty great for a lot of people
where you sell the call option the stock
doesn't rise option expires sell another
call option get the money stock doesn't
rise that far option expires and you
just wash rinse and repeat and you do
this over and over again and you're
creating this income stream for yourself
so that's the gist of how the cover call
strategy works now if you don't have 100
shares in your account already from some
prior purchase long ago you can do
what's called right here let's look at
this a traditional covered calls used
with 100 shares of stock that you
already have in your account or what you
can do is what's called a buy right
where you buy the 100 shares and you
sell the covered call at the same time
so let's just say you don't have any
shares in your account what you can do
is enter into a buy right where you buy
100 shares and you sell a call option
all in the same transaction a lot of
people do that as well but let's talk
about what the poor man's covered call
is so instead of actually having 100
shares in your account or going out and
buying 100 shares the poor man's covered
call substitutes that stock with a deep
in the- money call option okay so really
what you're going to be doing is that
you're going to be buying a call option
A really deep in the money call option
and I'll explain what that is in a
second and you're going to sell
the covered call against that purchased
call so it's really an option spread
you're going to be buying a call option
at one strike and you're going to sell
another call option at a different
strike price that acts as the covered
call but the thing about the the deep in
the money call option is that it pretty
much is going to act just like the stock
itself so instead of shelling out the
money to buy 100 shares of stock you're
going to buy a call option instead
that's going to cost you aot lot less
money okay so let's just kind of go
through our smart option seller Guide to
the poor men's covered call we'll scroll
down here a little
bit so poorman's covered call
substitutes the stock with a deep inth
the money call option and the stock
price and the and the call option the
deep in the money call option will
pretty much move in lock steps so you
know you're going to get all most of the
price appreciation that the stock would
have with your purchase call option okay
now if you ever if you've ever bought
call options before you know that they
cost a lot less than purchasing a 100
shares of stock we always talk about 100
shares of stock because each option
contract consists of 100 shares of stock
so we need to compare apples to apples
all right so we're going to look at an
an an an actual uh option trade here
which is an example only it's not a live
recommendation of how to substitute the
deep in the money call option for the
stock all right so and for those of you
that might not know what you know what
is a deep in the money call option what
does that actually
mean a deep in the money call option is
a strike price that's situated well
below the current price of the stock so
if the stock price is at 100 you can buy
let's say a $60 or a $70 strike call
option which is situated well below the
current price of the stock okay and
along with
that deep in the money comes What's
called the Delta the Delta tells you
pretty much how much the option price
will move in conjunction with the stock
price moving so a deep in the money call
option and what I'll explain a little
bit more here is that we always want to
look for a Delta of at least 90% Deltas
range from zero to 100 so we want to
focus on a Delta of at least 90% what
does that mean that means the option
price will move at least 90% of whatever
the stock price does that means you're
getting all that movement your option
price is going to move 90% of what the
stock price does but the option is going
to cost you a lot less money to purchase
it versus the 100 shares of stock so
let's just go and look at our example of
how this buying doing the poor men's
covered call Works versus the
traditional covered call okay so we're
going to look at AMD Advanced Micro
Devices as our um stock that we're
interested so let's just say you know
either you had 100 shares of AMD in your
account or you were going to buy 100
shares and sell a call at the same time
we're going to look at that versus
buying the poor man's covered call
instead so if we were to buy a 100
shares of AMD AMD when I took you know
started writing this this cheat sheet up
the screen capture AMD was trading
around
$16.30 so if you were to buy a 100
shares of AMD at 10630 that would be a
cash outlay upfront of10
$630 okay that's how much it would cost
you to buy the 100 shares and then the
traditional to sell the covered calls
let's just say you wanted to sell those
shares potentially at
$130 sometime in the future so what you
would do would right here you're going
to sell the October 20th 2023 130 strike
calls for a doll two per contract okay
when you sell that call option now
you're obligating yourself to
potentially sell your shares at 130 if
and only if AMD Rises to 130 above by
October and you're going to get paid a
dollar two per contract which is
actually
$102 whatever you see an option price
you have to multiply it by 100 the
option multiplier to to get the full or
realize what the full actual cash value
is so you sell the October 130 calls for
a dollar two per contract you're going
to get
$102 for your obligation to sell your
shares at 130 okay so at this time you
know that your your effective selling
point is 130 plus the dollar two that
you received so right here if AMD closes
above 130 you'll be forced to sell your
shares at an effective price of
$131.2 so you take the strike price of1
130 and you add the dollar two to it so
that's your
$131.2 would be your sell point if you
had to relinquish your shares
okay the profit in this would be
$24.76
game and that would be a um uh gain of
that would be a gain of
$2,472 with a return on investment of
23.3% which as we all know if you want
to figure out what your return on
investment is you take your gain divided
by your initial investment so your
2472 per dollar gain divided by the
10630 Buy price gives you a return of
23.3% not bad so if AMD Rises to 130
above you're going to have to relinquish
your shares you bought them at 10630 you
get to sell them at
13102 and here's all the dollar gains
now let's take a look at buying the deep
in the money call option instead of
actually buying the 100 shares of stock
and how it saves you a lot less money up
front and it's going to increase your
return on investment
byy a much greater amount so instead of
buying the 100 shares we're going to buy
a January 19th 2024 remember this is not
a real trade this is just an example
we're going to buy the $80 call which um
in this case had an
88.5 Delta and I'm going to show you the
option chain as
well and it's going to cost
$302 per contract which is a
$3,020 outlay of cash okay so let's
quickly go to the the option chain for
AMD here now this is my interactive
brokers um option chain here and this is
the broker that I use if you want a
little information about interactive
brokers down in the description below
the video is a link there you can check
that out so AMD here's the the tab now
this is I'm making this video before the
market open so these are prices left
over from yesterday um but but there is
some pre-market activity so AMD stock is
Trading 10660 1 right now when I took
the screen capture yesterday it was
about 10630 so some of these option
prices are going to look a little
different so here's the January 19th
2024 options now you want to make sure
that you have the Delta column in your
option chain now obviously the Market's
not open so none of the Delta Figures
were um are showing up right now but
yesterday when I or when I was making
this video before the market open um
this morning here's the 80 call so what
you would do is you want to make sure
you see what the Call's worth it it
closed at
$304 but as I said when I was making the
screen capture the value was about
$302 per contract we always want to look
at the current bid ass price to get us
the most accurate prices so whenever
you're looking for your option um prices
you know make sure you have the Delta
column here because when you buy the
deep in the money call option like I
said you want that Delta to be as close
to 90% as possible possible now this the
80 call right here was had about an 88.5
Delta round up towards 90 that that's
the option that we chose now we also
looked at selling the October um 130
calls which yesterday um closed at about
98 cents per contract at the time of the
screen capture was trading for about a
dollar two so that's I just want to show
you how where we get these numbers from
so let's go back to um
our cheet
here so we're looking at buying the deep
in the money call option instead of the
stock so right here we're going to buy
January 19th 2024 $80 call now you can
choose any expiration you want typically
when you're doing covered calls and you
own the stock you want to have the stock
for the long term so you want to pretty
much go out to an expiration date that
meets your you know your expectations of
how long you may hold the stock in this
case we're going out to January you can
look at something further out you could
look at something closer in expiration
that's entirely up to you whatever you
want to choose so the 80 call which had
an 88.5 Delta for $302 per contract cost
us
$3,020 and we'll also sell that same 130
call for dollar two per contract against
the option that we're buying which is
the 80 call okay so the cost basis for
the 80 call you always want to know what
your cost basis is the call is going to
be
$110.2 that's your cost basis if you you
know if you're buying the if you want to
figure out what your eventual return is
going to be you need to know what your
cost basis is so you take the $80 call
Value and you add the
$320 that you pay for the contract and
it gives you your your cost basis of
$110.2 so if you were to buy the actual
shares you'd buy them at
$16.30 but by buying the calls it's
going to cost you a little bit more your
cost basis is
11020
okay and um so that's that's where you
start and now you sell the call option
and now you have a purchase call the 80
call that you purchased and the $130
call that you've sold against it now if
AMD rises above 130 follow me here the
net gain the overall net gain is going
to be
$20.82 per contract or per share on the
call option which is
$2,082 and a return on investment of
69% so how do we find out those numbers
your gain of
$20.82 over your cost of
$302 is a return on investment of 69%
now some of you might not understand how
do you figure out what the gain is on
the call option so
remember if you bought the 80 call and
AMD finishes above
130 there's a $50 gain right there just
pretend you know you're buying your call
you get to buy the call at 80 when you
exercise the shares and you sell them at
130 that's a $50 gain but you have to
subtract out the
$302 that you paid for the call up front
Okay So eventually your your net gain is
going to be
$20.82 per share with which is
$282 and your return on investment is
69% so buying the deep in the money call
option saves you over
$7,600
upfront you know if you were to buy the
shares that would cost you $10,600 if
you buy the deep in the money call
option it only cost you
$3,000 $20 so you're saving yourself
over
$7,600 in upfront cash layout by buying
the deep in the money call option
instead in effect you're lowering your
overall risk of $7,600 as well let's
just say AMD craps out and goes to zero
goes bankrupt you're going to be saving
yourself
$7,600 of losses by buying the deep in
the money call option instead and you're
still getting almost all that same
movement all that same bang for your
buck that the stock would get you know
if the stock goes from 110 to 130 you
know there's that
$20 gain right there for the stock but
the same thing for I'm sorry if you buy
it at 106 up to 130 there's about a
$2,400 gain and the deep in the money
call option is going to make a $2,000
gain so you're making you know a couple
hundred dollar less with the deep in the
money call option you know as long as
the stock moves above 130 but but you
have to remember in that tradeoff of
making you know about $400 less in
profit you're saving yourself
$7,600 in upfront cost and
$7,600 less risk in the trade if AMD
craps out okay so here we go $7,600 less
downside risk if AMD drops to zero less
risk and better return on investment the
deep in the money call option you're
going to get a 69% return on your
investment versus the what do we get for
the
um the if you're just buying the shares
instead you're going to have that that
23.3% return on investment so less money
up front better return on investment
less risk to the downside with a 90%
Delta option you're going to get 90% of
whatever the stock moves so in my
opinion it's so much better to have less
money on the line less risk on the line
better return on investment the the
dollar gains are only a couple hundred
dollar difference I'd rather have that
and have all these other benefits okay
so you make sure you use the 90% Delta
in this case to substitute your stock
and use the deep in the money call
option instead it's just a better way a
more efficient way to use your money so
I'm go back up to the very first line
here the goal is to always use your
funds more efficiently with options
contracts compared to using the stock
that's why we love options so much
because you can you can use your money
so much more efficiently you know what
you do you take that $7,600 that you're
saving and put it into other trades or
put it into you know the 5% money market
funds earn that 5% interest these days
so it's so much better to use options
and in this case you're using a deep
inth the- money call substituting that
for the stock and this is what's called
the poorman's covered call why is it
called the poorman's covered call
because as a poor man you have to put up
less money to buy the shares of stock
you're you're saving yourself $7,600
that a poor man doesn't have okay so
that's really why it's called the poor
man's covered call and you're getting
all the same benefits you're getting
appreciation of the stock with the call
option and you're you're able to take in
money of spelling by selling the call
option now if that call option expires
worthless if the October option expires
worthless that's fine you're still
holding your January very deep in the
money call option so now you can sell a
November call option and if that one
expires worthless then you can sell a
December call option against your
January call option so you can keep
rolling it so that's why I say you can
go out further in time you can buy a
June of 2024 deep in the- money call
option if you want it's going to cost
you a little bit more money because the
further out in time you go the more it
costs but you can still make up for that
by Rolling the options for a few more
months instead of using the January 24
call option you understand what I'm
saying all right so that's really the
whole gist of it that's the lesson for
today is that you want to use a deep in
the money call option as a substitute
for the stock it's called the poor men's
covered call all right so let's quickly
go to our our website here um smart
option seller.com
and talk about um you know what we do
here at the smart option seller we are
put option sellers we love selling put
options we love selling options in
general so go to our website get our
free put selling Basics ebook if you
don't know anything about what put
selling is get this book right here
it'll tell tell you everything about it
why we love it so much scroll down here
at our website smart opsin seller.com
here it is called put selling Basics
scroll down put your name and email
address in here and we'll send you an
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we also have our put selling intensive
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about it also at the smart option seller
here's our services tab we run a couple
newsletters we have we have our coaching
Services all these things to help you
get your option trading to the next
level I'm going to put a couple other
videos on the screen we're going to I'll
put a deep in the money call option
video on the screen I'll put a put
selling video on the screen down in the
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use some technical analysis books that I
recommend some other websites that I
recommend take some time scrolling
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today poor man's covered call all right
everyone this is leel signing off
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