Covered Calls - AMAZING Option Trading Strategy - New Twist!

Summary

This 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

• 📈 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.
• 🤑 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.
• 💡 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.
• 💰 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.
• 🔄 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.
• 📉 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.
• 🚀 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.
• 🧮 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.
• 🌐 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'.
• 📚 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.
• 🔗 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.