Hello trader,

Do you have a desire to build a trading business that will generate consistent income for you and your family?

If you answered yes then I have something to share with you… 

Selling options is one of the fastest ways you can generate tremendous returns on your stock portfolio.

There are several reasons why, here are just a few:

  • Odds of winning over 60%+
  • Return on Investments of up to 100%
  • Defined risk on every trade
  • Paid upfront to take the trade

Of course, without the right game plan, even a great strategy can turn out to be a loser. That’s why I want to take the time and walk you through the mechanics of the covered call strategy. 

These simple, easy to follow rules will help you avoid disaster, and even put you on the path to consistent profits. 

 

The Covered Call Strategy

 

A covered call is an options strategy that allows a trader to collect additional income on a stock that is in their portfolio.  

This strategy is considered a mildly bullish strategy because the upside of the trade is capped from further gains.  This is unlike a long call option or long stock position which have unlimited upside potential.

When establishing a covered call position you would want to target a stock you own or plan to own in your portfolio.

Next, you want to select a strike price of a call option that is either at-the-money (ATM) or out-of-the-money (OTM).  

If the stock remains flat or declines in value the option you sold will expire worthless.  This means that you will get to keep the premium you received when they were sold.

For example, 

The Trade:  CORT – Buy 100 shares at $13.30 

 

Source: www.tradingview.com

 

I use a custom-built technical analysis scanner to find trades like these every week.  

Selling the calls for the Covered Call position can be done for many reasons.  

A few examples are:

  • Expecting a slightly bullish, if not bearish to neutral in the upcoming weeks or months
  • Technical level expected to suppress stock price in near term

Since $14.00 on the chart is a decent technical level to expect the stock to decline from, it’s a great candidate for a covered call strike price.

 

Source: think-or-swim

 

Taking a look at the option chain, the ATM calls are the best choice for this trade.  

Therefore…

The trade: Sold the May ’20 $14 covered call for $1.65

Let’s take a look at how this works:

 

Breakout Of The Trade

 

First, I always like to know what returns I can see from my trade. 

To find this, you want to divide the premium collected by the value of the stock position. 

For CORT:  165/1330 = 12.41% return of investment

Here is a sample of the risk diagram for the trade:

 

Source: think-or-swim

 

The covered call has two calculations, the max profit a trader can receive and the breakeven on their trade.  

Like a long stock position, the loss to the downside is the same.

Max Profit: Premium received + (Strike – Stock Price) = 1.65 + 0.70 =2.35

Breakeven: Stock price – premium received = 13.30 – 1.65 = 11.65

Now that you understand those two numbers…

How do you get to keep the entire premium?

The stock closes at or above $14 at the expiration date.  

In this case, you will collect the premium received plus the increase in the underlying stock price.  

This is the Max Profit calculated above, and will be $2.35 / contract

In other words, the max profit potential from this trade is 235/1330 = 17.69% profit!

As you can see, this strategy has the potential to significantly increase your returns on the stock position you currently have on.

Additionally, by selling calls against your long position, you are essentially hedging your bets on the trade.

If a stock was to sell off and go against you – the short calls will offset some of the losses on the initial stock trade.

 

Ways The Covered Calls Make Money

 

There are 2 ways the Covered Call strategy makes money:

  1. Stock stays flat or declines
  2. Stock trades higher

As you can see, this strategy has more than one shot at winning and that is extremely appealing to many traders.  

And if you are a new options trader, you have only had the luxury of having a single way to win trading stocks.

Additionally, the worst fear many stock traders have is actually the loss of potential profits instead of risk to the downside.

That is where a Covered Call strategy is not an ideal trade.  If you are extremely bullish on your stock, it is not recommended that you trade this strategy.

Why?

Well, the short call above your market price is going to limit your profit potential and cap your returns until the options expire or you exit your calls early.

That’s one of the biggest risks to a Covered Call trader.

Hold on… but what about the downside risk?

It’s essentially the same as owning the stock itself!  

There is no added risk to trading the covered call to the downside versus owning stock.

Next… let’s talk about what stocks you would want to select for this strategy.

 

Stock Selection For A Covered Call

 

This is definitely not a stock you would want to trade on Bitcoin, Tesla, or any high-flyer names.  

You will restrict all of the profit potential on those trades, essentially stepping over dollars to pick up pennies.  

Instead, the covered call strategy works well with blue-chip stocks and other slow growth sectors and companies.  

Since most blue-chip stocks have relatively low volatility, trading a covered call can go a long way in helping boost your returns on these otherwise sleepy names.

This is also where a stock screener tool can help make your stock selection easier.

There are many other ways you can trade a covered call.  One of them is using LEAPS instead of using the underlying stock to help with capital outlay for traders with smaller accounts. 

The “Poor Man’s” Covered Call is extremely useful for trading a stock that is expensive and otherwise unable for a small investor to be involved in, such as Google or Apple.

Great – now that you know how to select stocks… let’s talk about how to manage your position and unwind your options.

 

Trade Management

 

Trade management is difficult, even for the most experienced traders…and is even completely overlooked!

That’s why I put together the 7 rules in trade management that are available to you when trading a covered call and find yourself in a spot where you need to make a quick decision.

The 7 rules in Covered Calls trade management:

  1. Expiration: Do nothing and let your options expire worthless.
  2. Assignment: Do nothing and let your stock be called away at or before expiration.
  3. Close-out: Buy back the covered calls (at a gain or loss) and retain your stock.
  4. Unwind: Buy back the covered calls (at a gain or loss) and simultaneously sell your stock.
  5. Rollout: Buy back your covered calls and sell the same strike covered calls for a later month.
  6. Rollout and up: Buy back your covered calls and sell higher strike covered calls for a later month.
  7. Rollout and down: Buy back your covered calls and sell lower strike covered calls for a later month.

There you have it…those are my 7 rules in trade management for the Covered Call strategy.

 

Wrapping Up

 

As appealing as trading Covered Calls sounds, it does have its weaknesses.

It’s best to remember:

  • Covered Calls do not work for extremely bullish positions as it will limit your profit potential
  • Covered Calls do not prevent your account from having major losses like a Protective Put strategy would have

What are some other strategies other than a covered call?

Maybe you would prefer looking for a risk-defined strategy that is mildly bullish? If yes, consider the income generating strategy called a credit put spread.

The bottom line is this… as with most options strategies, there are many pros and cons to consider before placing a trade.  

And it is best if you take the time and understand exactly what risks you are potentially placing yourself in when trading this strategy before hitting that send button.

Now, if you are ready to jump into options trading with covered calls or need guidance when making your first step, click here to learn more details about the Options Profit Planner!

Author: Dave Lukas

 

Hearing the word “Options” puts fear into the eyes of investors and traders…and it shouldn’t!

New investors and traders believe that options are high-risk betting instruments… but that is not true!  

Much of the risk associated with options boils down to one of three reasons: a lack of understanding, a proper education, or enough experience.  

Do you think that trading options can be less risky than trading stocks?

Well, it’s true, they can be far less risky than trading stocks.    

So, with understanding the basics of how options work, you will soon be able to reap the rewards of owning stock all while limiting risk!

 

Calls and Puts – Overview

 

It’s important to understand how options work in order to trade them correctly and know where and when your position is open to risk.

Options contracts are priced using mathematical models such as the Black-Scholes and Binomial pricing models.

Some primary drivers of the price of an option are:  

  • Current stock price
  • Intrinsic value
  • Time to expiration or the time value
  • Volatility (Historical)
  • Interest rates
  • Cash dividends paid

Don’t worry – you don’t need to be a mathematician creating the next options pricing model.  

As an options trader there are many ways you can structure a trade to take advantage of different factors of the options price.  

For example,  if you are selling options you might want to closely monitor the time to expiration and the greek Theta that goes along with it.  

So.. just remember it’s good to just know these factors and what to keep on the lookout for as you trade options to keep you safe.

Now let’s start off with the basics and take a look at what makes options so much different than stocks.

 

Stock Risk Profiles

 

Don’t let the false information behind options trading fool you.  

As a stock trader, you don’t have “safer” trades than an options trader.  Arguably, it’s possible that you have significantly more risk compared to a stock trader.  Far more than you might realize.

What do I mean?  

 

Long Stock Example:

  • Profits: Unlimited
  • Loss: Limited (Stock only goes down to $0)

 

Short Stock Example:

  • Profits: Limited (Stock only goes down to $0)
  • Loss: Unlimited

 

Unfortunately, as a stock trader, you actually have significant losses that you can still have hit your account…

And basically, stocks can be equally as risky as options!

Let’s take a look at the above example but as a payout diagram of a long and short stock and see what the risk looks like.

 

 

As stated above… The long stock position has the potential for unlimited gains as a stock can go up indefinitely and limited losses by the stock going to $0.

Alternatively, a short position has the potential for unlimited losses as a stock can go up indefinitely and limited profits by the stock going to $0.

So… by using options, you can start to do a number of different things to protect your assets while making money. 

For example, you can hedge your long or short stock position to minimize risk, speculate on a stock direction, or a combo of each.

All while maintaining a tight risk management strategy for your account.

Let’s take a look at some example trading strategies with buying and selling options.

 

Long Call Options – Bullish Strategy

 

Call options are a contract that gives the buyer the right to buy a specific amount of stock, at a specified price, and before a certain date.  

These three basic criteria are known as: 

  1. Quantity
  2. Strike
  3. Expiration

When you buy options, you are betting that the stock price will rise in the future before the expiration date.  

Let’s take a look at the payout diagram for a long call option.

 

 

Long Calls:

  • Profits: Unlimited
  • Losses: Limited

This appears to be a strong argument to start buying call options instead of going long stock… And that’s what a lot of traders do! 

But there are many more benefits to a long call option than it’s unlimited profit potential.

 

Benefits of a long call option

 

When talking about options, there are two main reasons stock traders will jump to trading options.  

They are:

  • Risk-to-Reward Ratio
  • Leverage

 

Risk-To-Reward Ratio

 

Unlike stocks, trading long options can provide some of the best Risk-To-Reward ratios in the markets.  

Think of your “lotto ticket” trades… you know, the ones where your options are worth $0.10.  

Then out of thin air, and because of some news report, you wake up the next morning and you’re a newly minted millionaire from your options being worth $20.00.

Those stories exist, and they occur more frequently than you might think…  Which is why so many people buy stock options!

 

Leverage

 

Another reason that buying options is extremely popular is due to the build-in leverage the trader received from the contracts.

Generally speaking, each single options contract holds the buying power of 100 stock.

For example, you are a trader looking to buy a stock at $320 per share and you trade at 100 shares increments.  

You have 2 choices:

  1. To buy the stock and spend $32,000 for 100 shares of the stock
  2. To buy the 1 call option and spend $6.15, or $615 per contract!

 

 

You see… options can give you incredible leverage and allow you to hold the same buying power in stocks. Coupled with defined risk, it’s no wonder buying options is favored with both small and large investors.   

Now hold on.  I know you are about to run off and start buying call options on every stock in the market.  

But that’s the problem!  These call options are developed to expire worthless!  Every last one of them that is OTM will go to zero value by time expiration comes.

It’s very similar to playing the lottery or betting at the casino.  The odds just are not in the traders favor no matter how much you think they are.  

Except… There is one way to flip the script and put the house odds in your favor.  

And I don’t know about you, but I sure hate gambling… 

See how I would make this trade and guarantee that I put the odds that the casinos wish they had in my favor! 

Next…

 

Writing Put Options – Bullish Strategy

 

Even though the long call options have the potential to make unlimited profits, the reality is that very few, if any, actually make money.

This is where writing put options come into play… so instead of having 33% chance of winning per trade, we are well over 50%, up to 66%, or more!

 

How does selling a put work?

 

Well, one way to look at it is that options are nothing more than insurance policies from an insurance company.  

The insurance companies (market makers) write (sell) many insurance policies, and generate revenue (premium) each and every month (monthly expirations) as people pay their policy bills.

And the same goes for options… They are written insurance policies to hedge against adverse market moves for underlying stock holders.    

So options traders can put this to work for them by being the writer of option contracts and generate revenue as they do this.

Now…

Instead of buying a call, a trader would look to write (sell) an option that is out of the money (OTM).  

Let’s take a look at a sample payout diagram of a short put which is a bullish trading strategy.

 

 

Writing a Puts:

  • Profits: Limited
  • Losses: Unlimited

Now at first, it might seem like a high-risk trade, but it’s not.

I like to think about my risk to being the same as buying stock, and if I end up making a purchase, it will just be at a discount.  

Basically… a short put trader will have the opportunity to buy a stock at a lower price than it’s currently offered on the market.  And you will be getting paid upfront to wait for it to drop to your price!

 

Advantages to writing a Put:

 

  • Consistent Returns
    • Traders are able to generate some of the most stable and consistent returns compared to buying stocks or options.
  • Significant Returns
    • Traders are able to achieve 100% returns on all investments.
  • Immediate Returns 
    • Traders can generate returns on your capital quickly, as soon as 1 week.

 

Wrapping up

 

So there you go… how you have a few tools at your fingertips to get out there and start putting the odds in your favor to win on your trades.

Remember…

Buying calls have 2 main advantages over short calls:

They are:

  • Best risk-to-reward ratio in the entire market
  • 100x leverage with 1 contract = 100 shares

But those advantages come with a major downside, which is that every only 30% of the options are ever profitable and 90% of them expire worthless!

Which means slow-and-steady with writing (selling) puts is a much better way to go.

There are 3 major advantages of writing puts instead of buying calls.

They are:

  • Consistent Returns
    • Depending on your business income, a steady stream of revenue is the most important way to keep the lights on and the doors open.
  • Significant Returns
    • Traders are able to achieve 100% returns on all investments as options expire worthless over 90% of the time.
  • Immediate Returns 
    • Options as quick as weekly give traders access to immediate returns on their investment accounts.  Even though this is a marathon and not a sprint, it feels good to start placing winning trades in as little as 5 days.

 

Sign up and join Options Profit Planner to hear about more tips and tricks on selling options for income.

 

Author: Dave Lukas

Fun fact—It was reported that Robinhood brought in 11,600 users in the last three days, 79% of the new accounts bought Tesla (TSLA).

Talk about the mother of all short squeezes…

These TSLA bears are taking one helluva lashing.

While the “casuals” are buying Tesla stock at these elevated levels…. The pros continue to pound it short…

Just look at how hated TSLA is…

 

Source: Finviz

 

It’s got a 17.5% short float which is astronomical for a stock of this size with approximately $157bn market cap.

Based on market cap, you won’t find a more shorted stock thanTSLA, according to finviz.

 


Talk about some serious money being thrown around trying to trade this in the equities space!

So one of the issues with trading high dollar stocks, such as: TSLA, AMZN, AAPL, etc. is that it eliminates the small investor from the game.

So what is a retail trader supposed to do?

Especially, since going short TSLA would be considered extremely foolish, possibly even a bomb that can blow up your account at this point.

 

What a parabolic move lately! So how do you take advantage of a market move that is this extreme… yet do it safely?

Forget about buying puts or even daring to short the stock…

I’ll walk you through two strategies that can help you sleep at night, and even make a whole lot of money.

 

Shorting stocks using only options

Shorting stocks can be one of the most exciting parts of trading… and also the most dangerous.

The news media is driving excitement in TSLA over the last few days and causing traders to flock to the name.

… Traders are buzzing around TSLA as sharks swarm around their prey in a feeding frenzy.

It’s mayhem.

So as a trader, how do you keep yourself safe and still participate in a high profile trade like this?

In order to do so, safely… be sure to follow these bearish patterns…

 

Bearish option spreads for uncertain markets


2 key bearish spreads:

  1. Credit Call Spread
  2. Credit Bear Ratio Spread

With the increase in volatility, it is usually not a good idea to purchase a put option when looking to take a bearish trade in a stock.

Why?

Because of the kick-up in volatility these options are usually extremely expensive to purchase.

This is caused by traders looking to go short the stock in the options market and are driving the prices higher.

And as exuberance drives the stock price higher – traders are flocking into call options in hopes to have 10,000% gains overnight from a massive move higher.

So, what do you do if everything is overpriced?

Well, as an options trader that sees this phenomenon occurring it is actually better to sell options instead of buying them!

This is where a credit spread really shines over buying options.

First, let’s take a look at the risk profile for a long put option.

TSLA 1 x 21 Feb 20 900 Put @109.05

Max Loss = Cost of option
Max Loss = $10,905 / contract

Breakeven = 900 – 109.05 = 790.95

And this is the risk profile for the put option.

 

Source: Think or swim


This means that TSLA would have to fall to 790.95 before expiration just to not lose on this trade!

And you don’t even make any money even though you picked the direction correctly!

In other words, TSLA would need to sell off more than 10% before you realize profits.

Now I know you are shocked. I know I am.

And you are probably thinking… how does this happen!?

Well, this is a great example of how Implied Volatility impactings the options pricing.  

 

1 – Credit Call Spread

Instead, let’s use something called a Credit Call Spread to take advantage of overpriced call options and avoid the trap of buying overpriced put options.

What does this trade look like…

The spread:

Buy 1x TSLA 21 FEB 20 1100 CALL @ $47.90
Sell 1x TSLA 21 FEB 20 1000 CALL @ $62.00

Max Profit = $1,410
Break even = $1,013.96

 

Source: Think or swim


Here is the option risk profile for the TSLA credit call spread.

As you can tell, we will begin collecting income without any price movement.

Why?

Well the way credit spreads are designed, they allow traders to capture profits if the stock goes up slightly, stays neutral, or turns bearish.

This way, if TSLA experiences a sell off at any size, you will be making money.   Whereas the put buyer would need TSLA to drop over 10% or further to get back to breakeven.

 

2 – Credit Bear Ratio Spread

This is a more advanced trade strategy, but it allows for a trader to have their cake and eat it too.

The Credit Bear Ratio Spreads will let a trader receive a credit for the trade if the underlying stock stays neutral to bullish.

In the event of a massive sell-off, the trader will have unlimited downside profits.

And for the “middle” of the chart, depending on how fast the stock sold off, you may never realize the max loss as increased implied volatility will keep your losses under control.

The trade:

Sell 1 x TSLA 21 FEB 20 920 put @ 110.20
Buy 2 x TSLA 21 Feb 20 735 put @ 32.55

Payoff:

If the stock stays neutral to bullish, you will receive max credit on the spread

Max credit profit = $45.10 per contract
Max loss = $139.00 per contract
Max Profits = unlimited

 

Source: Think or swim

 

Wrapping up

Shorting stocks can be one of the most exciting parts of trading… and also the most dangerous.

As a trader, how do you keep yourself safe and still participate in a high profile trade like this?

In order to do so, safely, it’s best to learn how to use bearish options strategies .

By following the two examples of credit spreads, you will have a more safe way to capitalize on a short TSLA trade than selling stock.

Also these two examples are great ways to turn Implied Volatility (IV) to work in your favor and also allow you to get paid to place the trade!

To learn more about credit spreads and how to harness the power of options without spending an arm and a leg…

Click here to sign up today!

Author: Dave Lukas

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