You can TRIPLE your income from covered calls (simple tweak)

Summary

In this video, Mike Belafuri and Seth Freiberg from SMB Capital reveal a powerful strategy to enhance returns on covered call campaigns. By utilizing a synthetic covered call approach, traders can significantly reduce capital risk while increasing profits. Through a detailed example, they demonstrate how a traditional covered call with a 22.1% return can be transformed into a synthetic covered call yielding over 100% return with less risk. The strategy involves leveraging leap call options and selling calls against them, providing an efficient and profitable way to grow a trading account.

Takeaways

• 😀 Traders can supercharge covered call campaigns by using a technique that boosts returns while reducing risk.
• 😀 A traditional covered call strategy can yield solid returns, but there is a more capital-efficient approach that can significantly enhance profitability.
• 😀 A call option gives the buyer the right to buy 100 shares of a stock at a specific price, known as the strike price.
• 😀 When a trader sells a call option, they collect a premium and assume the risk of having to sell their shares if the stock price exceeds the strike price.
• 😀 In a standard covered call, the trader owns 100 shares of stock and sells a call option on those shares to generate income through premiums.
• 😀 In the example with Exxon (XOM), the trader made a 22.1% return by selling calls on XOM shares over a six-month period.
• 😀 In the original strategy, the trader collected premium income each month, but the stock price remained below the strike price, meaning the options expired worthless and the trader kept the premiums.
• 😀 In October, the trader’s stock was assigned when the XOM price exceeded the strike price, leading to the sale of the shares at the strike price, realizing a profit from the sale of both the shares and the options premiums.
• 😀 A more advanced approach, called the synthetic covered call, uses long-term call options (LEAPs) instead of owning the underlying stock, reducing the capital required and risk involved.
• 😀 The synthetic covered call strategy significantly increased profits, yielding a 105.6% return compared to the 22.1% return from the traditional covered call strategy.
• 😀 By using leap options and selling matching short-term calls, traders can create higher income while maintaining lower capital risk, leading to potentially much larger profits in a shorter period.

Q & A

What is the main strategy being discussed in this video?

The video discusses how to supercharge returns in a covered call campaign by using a synthetic covered call strategy, which boosts profits and reduces risk compared to traditional covered calls.

How does a traditional covered call work?

A traditional covered call involves owning 100 shares of stock and selling a call option on those shares. If the stock price stays below the strike price of the option, the call expires worthless, and the trader keeps the premium. If the stock price rises above the strike price, the stock is sold at the strike price, and the trader still keeps the premium.

What is a synthetic covered call?

A synthetic covered call involves buying long-term call options (LEAPS) and selling short-term calls against those options. This approach requires less capital and reduces risk, while potentially offering higher returns.

What is the key benefit of using a synthetic covered call?

The key benefit is that it allows traders to achieve a significantly higher return with much less capital risk compared to a traditional covered call, as demonstrated in the example where the synthetic approach resulted in a 105.6% return.

Why did the trader in the example switch from a traditional covered call to a synthetic covered call?

The trader switched to a synthetic covered call to reduce capital requirements and risk while aiming to increase the overall return on investment. The synthetic approach allows for more cash flow from premiums and better risk management.

How does the capital outlay differ between a traditional covered call and a synthetic covered call?

In a traditional covered call, the capital outlay involves purchasing the shares of the stock. In a synthetic covered call, the trader buys LEAP call options instead of shares, requiring much less capital while still retaining the ability to sell calls against them.

How did the returns of the traditional covered call campaign compare to the synthetic covered call campaign?

The traditional covered call campaign yielded a 22.1% return over six months, while the synthetic covered call campaign yielded a much higher 105.6% return over the same period.

What role do call option premiums play in the strategy?

The premiums collected from selling call options provide consistent cash flow throughout the campaign. This cash flow helps offset the initial capital investment and increases the overall return on the trade.

What happens when the call options expire in a covered call strategy?

When the call options expire, if the stock price is below the strike price, the options expire worthless, and the trader keeps the premium. If the stock price is above the strike price, the trader sells the stock at the strike price, keeps the premium, and exits the trade.

Why was the synthetic covered call campaign more capital-efficient than the traditional method?

The synthetic covered call required only purchasing LEAP call options instead of the actual stock, reducing the initial capital requirement and therefore lowering the capital at risk while still generating significant returns from the premiums.