COVERED SALE WITH MULTIPLICATION: THE SMARTEST STRATEGY

Summary

In this video, Stephanie Mandoles introduces a smart strategy to replace traditional covered calls with a more dynamic approach involving options. She demonstrates how to use options for potentially greater profits, risk management, and increased premium collection by buying longer-term calls with the proceeds from selling short-term calls. Stephanie explains the power of option multiplication, where the actions of the investor’s portfolio generate more options, potentially leading to greater returns without additional costs. The strategy is adaptable to various market conditions, including both price increases and declines, offering flexibility and long-term potential.

Takeaways

• 😀 The traditional covered call strategy can be enhanced using a smarter approach involving long calls and a multiplication effect with options.
• 😀 Stephanie Mandoles introduces a method for replacing the traditional covered call with a more flexible and potent strategy using options.
• 😀 In this strategy, you use the premium from selling covered calls to purchase long calls with a far-off expiration date, creating more potential for profit.
• 😀 This approach allows you to sell a smaller number of covered calls, backed by both your shares and additional long calls bought with the premium.
• 😀 If the underlying asset appreciates in value, you can roll the long calls to higher strikes, increasing potential profit while protecting gains.
• 😀 In a lateral market (price stays the same), the sold calls become worthless, and you can sell more calls in the next expiration period to collect additional premium.
• 😀 The multiplication effect allows you to continuously sell more options and use the premiums to purchase additional long calls, amplifying your portfolio's returns without additional out-of-pocket costs.
• 😀 In a down market, you can sell calls slightly below your average price, using the premiums to buy additional long calls, maintaining flexibility to profit even in a downturn.
• 😀 This strategy, referred to as 'permanent spread' or 'trava perene,' is designed to be ongoing, allowing adjustments to be made for every expiration date without a set end.
• 😀 The method focuses on generating consistent income through options while minimizing risk and leveraging existing stock holdings to increase potential profits.

Q & A

What is the main idea behind the strategy presented in the video?

The strategy aims to replace traditional covered call selling with a more sophisticated approach using options. It focuses on using the proceeds from the sale of covered calls to purchase longer-term calls, thereby enhancing returns and managing risk.

How does the new strategy differ from traditional covered call selling?

In traditional covered call selling, the investor sells calls against their stock to generate premium income. The new strategy, however, involves using the premium from covered call sales to buy longer-dated calls, effectively creating a hybrid strategy that increases potential profit and reduces risk exposure.

What is the significance of buying long calls in this strategy?

Buying long calls provides additional coverage for the sold calls. It creates a form of insurance for the investor, allowing them to sell additional calls while maintaining a hedged position in case the stock price moves significantly.

What is meant by 'multiplication' in the context of this strategy?

'Multiplication' refers to the process of repeatedly using the income from selling calls to purchase more long calls, thereby increasing the number of options contracts the investor holds. This strategy allows for the potential to generate even more premium income without having to use additional capital.

How does this strategy help in a rising market scenario?

In a rising market, the investor can roll the sold calls up to higher strikes, ensuring they continue to benefit from the stock's appreciation. The long calls also allow the investor to maintain a position in the stock, capturing more upside while managing risk.

What happens in a sideways market under this strategy?

In a sideways market, the sold calls expire worthless, and the investor can then sell new calls for the next expiration, potentially increasing the premium income. The long calls are protected from loss, and the investor can adjust their strategy to continue generating income.

How can this strategy be applied in a market downturn?

In a market downturn, the investor can sell calls at a lower strike price, close to their average purchase price, while still using the income to buy more long calls. This helps to reduce losses and allows for potential recovery if the market rebounds.

What is a 'trava perene' in the context of this strategy?

A 'trava perene' is a perpetual spread strategy where the investor continuously rolls their options positions to generate income. This strategy doesn't have an end point unless the stock experiences a significant drop or rise, making it a long-term, ongoing income-generating method.

How does the strategy improve premium income over time?

By using the proceeds from the sale of covered calls to buy long calls and continuously adjusting the positions, the strategy increases the number of contracts held, allowing the investor to sell more calls and collect higher premiums. This creates a compounding effect over time.

What is the main risk associated with this strategy?

The main risk is that the stock may not move as expected. If the stock price falls significantly or remains stagnant for too long, the long calls may lose value, and the premium income from the sold calls may not be sufficient to cover the costs of the purchased calls. However, the strategy is designed to manage these risks through diversification of options positions.