Thanks for putting these videos out - the only thing the community should know is that initially, you started with 85.86 SPY Delta share equivalent with the 3x3 "poor's man covered call while the original covered call had a 69.42 SPY Delta share equivalent at initiation. The 10x return on capital is overstated and, in this case, partially equivalent... PMCCs are great if the market goes up... if the market goes down below the $390 strike, you end up with nothing at expiration. Something to remember! Cheers
Yep, came on here to say the same exact thing. 390 strike will have a much higher delta than the 420 being sold. To translate for others, that means the more expensive call will lose its value much faster than the cheaper one being sold. This is a near perfect situation being shown, where the 390 keeps its value and the SPY closes just below the 420 call at expiration. Not to say this is a bad strategy, it can be very good. Just not in a falling market. Save it for the bull runs.
If the market goes below 390, the calls you bought expire worthless however arent the 420 calls you sold going to be way deep in the money, possibly even enough to cover the 6k loss?
Thanks for the straight forward explanation of the debit spread, although it should have been mentioned the kind of trading account required (leverage) and the options approval level needed in order to make it clear for new traders.
Yeah. It's also good to mention gotchas, too... - small accounts should avoid suffering to carry a margin loan over the weekend...so expect to manage before expiration to avoid a costly cash debit... - the calculated profit-and-loss value assumes you hold until expiration and liquidate precisely (usually possible, but not always) - spreads mean you need to think more about pin risk (for your delta exposure) and also gamma (due to possible fast changes in position value over time) - with interest rates volatile, you may check an economic calendar to harmonize your entries/exits with announcements, etc (partially because you're basically borrowing the stock from whomever has to buy it to hedge the other side of your trade... You pay the carry) Could be another video
Great video and at the end you said that we need to know the direction of the stock but sometimes that direction changes against Us in the middle of the trade or last minute so the best way to fixing this is to close the trade in that moment for a loss ? Thanks in advance
I think that all of these videos are great and help immensely! One video recommended back testing option strategies. Is there software that SMB recommends for this? Any suggestions will be appreciated.
I know the point is to reduce capital commitment, but I would argue for doing a smaller number of deeper in the money calls (especially for something liquid like SPY). Personally, I don't want to be buying all of that gamma/vega if I'm mainly after a synthetic loan to get delta exposure. You could also peel off unneeded cost by selling the long call's corresponding put, but that generally requires much more margin which likely defeats the purpose for the intended audience. (Conversely, if you really like that the spread has capped downside losses unlike the covered call's shares, then realize that is a big part of the cost of the call premium you're paying for, that it is overpriced, etc) Anyway, choose your adventure, and plan ahead!
First off, thank you for the clear explanation. This was understandable by the non-trader members of my family. Surprise, I never knew that proprietary trading firms engaged in covered call trades and their variants like the spread demonstrated. Watching from our "secret retirement" location in Bulacan province on Luzon in the Republic of the Philippine Islands.
You plan for that at position open. - You might only open 1or 2 spreads instead of 3 (and use the remaining capital elsewhere) - you might set parameters for when to add inexpensive positive convexity (eg, natural or synthetic put) if the trade goes in your favor
break even point for this trade is $15.91 (4773/3/100) so if SPY trade below $405.91 (390+15.91) at expiration date, you start getting hammered... am I correct?
If you compare apples with apples, this technique is cheaper but giving the same delta as a stock on the upside with calls. Having some hedges in the account, its more easy to compensate losses, comparing to owing stocks
worth mentioning that price has to increase to at least $406, or you lose almost everything in your small account. Of course you can adjust positions as the trade goes on.
I see. With SPY @ $395/sh at open, and the $390 calls at $22.93/sh, you need enough directional volatility to recover the $17.93/sh extrinsic paid, less the $7.02/sh short premium received -> profit when SPY closes on expiration above $405.91/sh However, if SPY closes at $400/sh the loss is $5.91/sh per spread, not the full $15.91/sh per spread This all assumes you immediately liquidate the shares from exercise at the settlement price (which would make sense if you have a small account)
So the key lesson is if you get the direction wrong more often then not, your account will eventually get wiped out. That’s why so many options traders go broke. It’s much harder than you think.
If SPY closes at 385 on expiration: - the covered call would lose $10/share x 100 shares ($1000) but keep the $702 premium from the 420 strike call, a loss of $298 on the ~$38k capital. - The debit spread also keeps the $702 premium from the short 420 call for each spread, but would lose 100% of the premium paid for each of the long 390 strike call options ($2293 per 390 strike call contract), so a loss of $1591 per spread, or $4773 for all 3 spreads, which is all of the net capital in the trade
This was the perfect example it went perfect but spy would have closed at 390 or below you would got killed. We’re if you owned the shares and it closes at 390 or little below you make money.
Great until the stock tanks and your Call is worthless. Buy LEAPS I hear you say - but they are very expensive. Alternatively - the stock races past your Call sold and you're left thinking - Shit if only I hadn't sold that Call...I would now be deep ITM.
I think this trade is more illustrative than practical. The problem is it is too dependent on directional movement. You can easily get whipsawed out of this trade by watching the long call decay which can be alarming if the underlying isn't moving. The PMCC strategy is better with a diagonal with the long call much further out in time. Better to watch the video trading with a leap.
When I just started learning and wasn't familiar with the basics & first encountered this channel, I felt like I was learning so much & wondered why this info is free. With experience I've learned to know otherwise, beyond the basics, most of their advice is trash for regular folk. If you're a small account, this strategy here is horrendous advice. Don't do this shit, it'll wipe out what little you do have.
What about the Greeks.. as others have already said this would work only if it goes considerably towards your direction otherwise poof... Your initial capital is gone.. bye bye trading account 😂
Thanks for putting these videos out - the only thing the community should know is that initially, you started with 85.86 SPY Delta share equivalent with the 3x3 "poor's man covered call while the original covered call had a 69.42 SPY Delta share equivalent at initiation. The 10x return on capital is overstated and, in this case, partially equivalent... PMCCs are great if the market goes up... if the market goes down below the $390 strike, you end up with nothing at expiration. Something to remember! Cheers
Yep, came on here to say the same exact thing. 390 strike will have a much higher delta than the 420 being sold. To translate for others, that means the more expensive call will lose its value much faster than the cheaper one being sold. This is a near perfect situation being shown, where the 390 keeps its value and the SPY closes just below the 420 call at expiration. Not to say this is a bad strategy, it can be very good. Just not in a falling market. Save it for the bull runs.
If the market goes below 390, the calls you bought expire worthless however arent the 420 calls you sold going to be way deep in the money, possibly even enough to cover the 6k loss?
It works if price stock goes up and has to be right in direction
Thanks for the straight forward explanation of the debit spread, although it should have been mentioned the kind of trading account required (leverage) and the options approval level needed in order to make it clear for new traders.
Yeah. It's also good to mention gotchas, too...
- small accounts should avoid suffering to carry a margin loan over the weekend...so expect to manage before expiration to avoid a costly cash debit...
- the calculated profit-and-loss value assumes you hold until expiration and liquidate precisely (usually possible, but not always)
- spreads mean you need to think more about pin risk (for your delta exposure) and also gamma (due to possible fast changes in position value over time)
- with interest rates volatile, you may check an economic calendar to harmonize your entries/exits with announcements, etc (partially because you're basically borrowing the stock from whomever has to buy it to hedge the other side of your trade... You pay the carry)
Could be another video
Great video and at the end you said that we need to know the direction of the stock but sometimes that direction changes against Us in the middle of the trade or last minute so the best way to fixing this is to close the trade in that moment for a loss ?
Thanks in advance
Great analysis as usual.
How to select stocks to Trade for covered calls ?
I think that all of these videos are great and help immensely! One video recommended back testing option strategies. Is there software that SMB recommends for this? Any suggestions will be appreciated.
I know the point is to reduce capital commitment, but I would argue for doing a smaller number of deeper in the money calls (especially for something liquid like SPY). Personally, I don't want to be buying all of that gamma/vega if I'm mainly after a synthetic loan to get delta exposure.
You could also peel off unneeded cost by selling the long call's corresponding put, but that generally requires much more margin which likely defeats the purpose for the intended audience. (Conversely, if you really like that the spread has capped downside losses unlike the covered call's shares, then realize that is a big part of the cost of the call premium you're paying for, that it is overpriced, etc)
Anyway, choose your adventure, and plan ahead!
First off, thank you for the clear explanation. This was understandable by the non-trader members of my family. Surprise, I never knew that proprietary trading firms engaged in covered call trades and their variants like the spread demonstrated. Watching from our "secret retirement" location in Bulacan province on Luzon in the Republic of the Philippine Islands.
what do you do it the call falls way below the entry price?
You plan for that at position open.
- You might only open 1or 2 spreads instead of 3 (and use the remaining capital elsewhere)
- you might set parameters for when to add inexpensive positive convexity (eg, natural or synthetic put) if the trade goes in your favor
So if it goes wrong ...
A better option would be to buy deep in the money leap call and sell calls against it every month to pocket premium.
Oh yes!
break even point for this trade is $15.91 (4773/3/100) so if SPY trade below $405.91 (390+15.91) at expiration date, you start getting hammered... am I correct?
If you compare apples with apples, this technique is cheaper but giving the same delta as a stock on the upside with calls. Having some hedges in the account, its more easy to compensate losses, comparing to owing stocks
worth mentioning that price has to increase to at least $406, or you lose almost everything in your small account. Of course you can adjust positions as the trade goes on.
I see. With SPY @ $395/sh at open, and the $390 calls at $22.93/sh, you need enough directional volatility to recover the $17.93/sh extrinsic paid, less the $7.02/sh short premium received -> profit when SPY closes on expiration above $405.91/sh
However, if SPY closes at $400/sh the loss is $5.91/sh per spread, not the full $15.91/sh per spread
This all assumes you immediately liquidate the shares from exercise at the settlement price (which would make sense if you have a small account)
I thought you were going to talk about calendar spreads or diagonals.
Why not select stocks with low share price ? This helps those who want to minimise cost of 100 shares .
So the key lesson is if you get the direction wrong more often then not, your account will eventually get wiped out. That’s why so many options traders go broke. It’s much harder than you think.
I like to use the POOR MAN'S COVERED CALL.
How much do you lose if it goes against you? Risk management is a lot more important than how much you make!
If SPY closes at 385 on expiration:
- the covered call would lose $10/share x 100 shares ($1000) but keep the $702 premium from the 420 strike call, a loss of $298 on the ~$38k capital.
- The debit spread also keeps the $702 premium from the short 420 call for each spread, but would lose 100% of the premium paid for each of the long 390 strike call options ($2293 per 390 strike call contract), so a loss of $1591 per spread, or $4773 for all 3 spreads, which is all of the net capital in the trade
@@OurNewestMember so in other words, it is a YOLO strategy for a small account, at least for SPY. Thanks!
Fewer companies seem to split their high-priced stock nowadays. Making regular covered calls harder.
So how come you guys did not suggest the poor man covered call, it is a little more work, but it knocks the risk down alot?
This was the perfect example it went perfect but spy would have closed at 390 or below you would got killed. We’re if you owned the shares and it closes at 390 or little below you make money.
The strategy is called : Vertical Call, nothing else.
Why not trade a stock that you can buy 100 shares for $5000 ? What is wrong with doing that ?
Great until the stock tanks and your Call is worthless. Buy LEAPS I hear you say - but they are very expensive. Alternatively - the stock races past your Call sold and you're left thinking - Shit if only I hadn't sold that Call...I would now be deep ITM.
I usually roll it to a higher strike price for 15%+ APY return (additional price of the stock) I would gain on the money im stuck in the position
I think this trade is more illustrative than practical. The problem is it is too dependent on directional movement. You can easily get whipsawed out of this trade by watching the long call decay which can be alarming if the underlying isn't moving. The PMCC strategy is better with a diagonal with the long call much further out in time. Better to watch the video trading with a leap.
this is a terrible strategy for small accounts. the #1 rule is to not lose money. and this treade has the potential to wipe out your small account
When I just started learning and wasn't familiar with the basics & first encountered this channel, I felt like I was learning so much & wondered why this info is free. With experience I've learned to know otherwise, beyond the basics, most of their advice is trash for regular folk. If you're a small account, this strategy here is horrendous advice. Don't do this shit, it'll wipe out what little you do have.
What about the Greeks.. as others have already said this would work only if it goes considerably towards your direction otherwise poof... Your initial capital is gone.. bye bye trading account 😂