Great video, just a point regarding the calculation of profit on the ITM call, you get 22.22 Back so essentially you are in it for 145 because you got the difference paid back to you immediately. You should actually divide that 4.16 premium on 145 because that’s how much you have left in the trade.
Hey sonny. I've done this with a trade on IBM. Collected about a half extra percent in premium. You do have to be quick with your execution and you basically have to put your option order in for whatever the current price is. If you don't get filled you do run the risk of the trade not working anymore. Great comment 💪
Puts will be ostensibly cheaper especially at this high interest rate environment. You forget to mention when selling a put all your cash could be in treasury bonds making 5%+ with no risk. If you include interest rate and rho in your calculation, all your examples’s outperformance goes away quickly. Deep ITM calls also have huge bid ask spread in comparison, so….you lose more when you enter the trade. There’s no free money, and the two strategies should theoretically be 100% equal when all is taken into account. Any inequality in these high volume options, when all factors are considered, will be arbitraged away in milliseconds: if there really was a mispricing like you demonstrated in the video that is higher than the interest rate of borrowing, someone would borrow money, buy the stock, sell the call and buy the put at the same strike, thereby generating risk-free money out of thin air. You really need to understand this before making more videos like this.
I've done this strategy on IBM and QQQ before. Prices arent reflected accurately due to after hours pricing. Go on your brokerage today and you can do this with Home Depot. This is not free money. There are still risks.
@@notafinancialadvisor69 you didn’t understand what I was saying. Doesn’t matter which ticker or what have you. You simply failed to consider interest rate. HD currently at 303.6. 7/14 270 C goes for 35.6 ( mid of bid ask), 270 P goes for 0.71. Return of 270 covered call is 2.00, for short P is 0.71. The difference, 1.21 out of 270 for 36 days, annualized is 4.6%, lower than the risk free rate of 1-month Tbill. So, you could get more money by selling CSP and putting your money in the Tbill than if you sell deep ITM covered call.
@@notafinancialadvisor69 my reference to free money is not regarding your strategy, is regarding the arbitrage that your strategy implies. If your strategy gives covered call an edge over csp that is greater than the borrowing rate, then a truly risk free arbitrage exists, which is free money. I’m not saying that arbitrage is impossible, just fleeting and rare
@@dantong5623 yes with a strike price that low that is true. For my own knowledge, how can you have your money in a tbill and still sell puts? Wouldn't your money be locked away with either the tbill or a csp?
This strategy is good only if the option expires ITM. For your TSLA example, what if on expiry TSLA's price is $140? You'd keep the stock at loss, and if you sell further ITM Call, the premium wont cover the loss!
True. Same like selling puts. You get assigned and are at a loss for a bit. Can sell CC at breakeven point or further down depending how badly it blew through the strike price.
@@notafinancialadvisor69 so it seems to me then that you can run the wheel like this. In which case, opening a wheel is something like picking a target price on a stock, buying the stock, and selling calls at the target price, and buying it back as needed.
This is exactly what you should be worried about, if (when) TSLA tanks next you'll be losing 30-60% of your position and never get in the green again for many years or likely forever. Not worth the risk for a potential 3% one-time gain imo
@@youtuber9991 While this is true, you can always write calls at a lower delta to reduce the basis on the TSLA shares, and roll the calls should they ever be tested. TSLA is a SPX stock, the chances of it tanking and never recovering is immeasurably low. Plus, Elon's wealth is tied into this stock. You can bet that he'll do something to cause investor stir resulting in the share price going back up.
Sorry if you mentioned this and I missed it, but how much of that 4.16 ITM cc was extrinsic? Because that 2.64 put was all extrinsic. So unless I’m missing something, if Tsla stays up or goes sideways, your profit on the put would be 2.64 on the put, compared to price minus the ITM cc extrinsic value. Would the ITM cc still be more %? Thanks and God bless!
The 4.16 is all extrinsic value. That was the difference in subtracting the 26.38 (premium) with the intrinsic value of the call 22.22 (stock price minus the strike price).
Great video. The only other detail I would add, is that while selling cash secured puts, you do also get paid interest by your broker on the cash, for Interactive Brokers that's .50% below current Fed funds rate. Selling in the money covered calls still has the edge, but you do get the interest with cash secured puts.
Rather than buy the stock outright, I tend to sell an at the money put. Collect maximum premium and maybe or maybe not get put the stock. However if I do get put the stock I then sell the deep in the money call.
One thing you should mention is the delta of both the $145 short put and the $145 short call. As delta approaches 1.0, the extrinsic value within the option premium goes to $0. This is an important piece of information regarding this video. The extrinsic component of the premium is maximized at delta ~0.5, and writing calls near this delta will always be more profitable than writing calls further ITM at say delta ~0.25.
At Fidelity I get 5% on my cash, so by not purchasing stock I am earning interest. This will make up the difference on the higher premium collected by selling a covered call. Plus u dont have the risk by owing the stock and losing value.
I made a spreadsheet in the updated video where you can calculate if it's better to sell puts or ITM Covered Calls depending on the current savings rate :)
If you monitor the expire dates, and dividend dates carefully, you could simply roll your short call side ways the day before expire or on expire day and keep collecting premium. If you know what you doing you can substitute leaps for the stop and get between 2.5 times to 4 times the return You can also lose your shirt.
Interesting approach. How does theta decay affect the ITM CC strategy? If TSLA dropped to $160 with a week remaining in the contract, would an equivalent amount of extrinsic value have burned off compared to a an OTM CSP at $145? I’m going to open trades for both strategies at the same time on something cheap and volatile with high premium like RIOT or MPW and see how each trade behaves with price movement. Thanks for the video, great analysis!
Just FYI, if you don’t use Robinhood you can get much better margin use selling outs from most other brokers. Selling puts with the better margin use is ultimately a better strategy. If you really want to boost the return % of this strategy, create an ITM call debit spread rather than buying the shares. That will use less margin and get you a higher return than selling cash secured puts.
Very possible! I've just gotten burned with ITM call debit spreads before. I don't utilize them too much anymore. And thanks for the tip regarding Robinhood. I am just a Robinhood whore since I mostly trade at work on my phone.
What what? Deep ITM option have little-to-none extrinsic value. Or from another perspective, options with high delta acts almost like 100 shares. Selling deep ITM calls is basically a short position with a little premium. Combined with shares, you are exactly balanced. I don't understand why I should do this instead of selling ATM calls
I view it as a low risk way to collect income. If the stock tanks you still have a high chance of making money or breaking even. If you sell an ATM call you breakeven price is much higher.
The problem with selling deep in the money covered calls is if the stock drops your just losing money. Your hoping your premium exceeds the drop in price. The examples you gave didn't show any movement in the stock price.
@@notafinancialadvisor69 it’s just all hypothetical. Selling the put wound use only about 5k comparing to buying 100 shares and selling the call. The risks would be completely different. If that works for you then I guess it’s ok. I know there are many ways to do things. I think it would be easier to sell a iron condor. Even though I’m not huge fan of them but a least it’s limited risk and probably good starting strategy for people starting out. Just my thought.
The ITM option trade percent is incorrect. On the first example of TESLA the stock price is $167.22 with a strike price of $145.00 and option premium of $26.38. I agree the gain is $4.16; however, the amount invested is not $167.22. It is the difference between the stock price and the option premium which is $140.84 ($167.22 - $26.38 = $140.84). The correct answer is 2.94% ($4.16/$140.84 = 2.95%). This is better than what you show. The QQQ example is also incorrect.
Yes, but you still need $167.22 (x 100) to execute the trade which is why I divide by that number. If you don have that amount you cannot execute the trade so, IMO, it's irrelevant using $140.84.
@@OptionsCB In my example I purchased the stock price. That is why I used the purchase price. I did not execute the trade without purchasing the stocks. That it why I use the amount of capitol I put in. You can use your own calculations if you want. But I will be sticking to my math :)
I've been doing this in my IRA because I don't have margin nor level 3 options and its not worth holding cash in the account in reserve at .015% interest when selling puts. So I just do short term in the money covered calls on stocks going ex-dividend in the next few days. Thanks for the video!
@@notafinancialadvisor69 Yeah, I could switch away from e*trade, or eventually once I get more options trading history built up, request level 3 options to reduce the CPP needed by doing put credit spreads.
For ITM CC, I understand that the permium will decrease when the price drops, so when is a good time to roll down and out? When the premium gets below the ATM premium (9.33) or the CSP premium(2.64)? In the tsla example
Robinhood is actually one of the cheapest I found. You do have to pay $5 a month for their Gold membership, but I make that back with the cash earning interest in the account.
You would have to buy Tesla at the current price so it will cost you $16722 but I agree the % return may not quite as much because the prices are much wider in ITM call compared to OTM put and not sure if that prices shown is the mid price which may not be accurate with the market closed and may not get filled at that price but even at 0.7% difference I am not sure it's worth it as you will lose money on the stock if it goes down and may get called away at a lower price Ideally you would place this trade in an overbought condition so it will get called away at a higher price from where it was bought
I am glad you are not a financial advisor. A real financial advisor would keep this advice to himself. Two questions: (1) how do you pick the strike price relative to the current stock price, (2) how do you pick the expiration date of the call option relative to the date you purchased the stock?
I just do it on how much risk I want to take on. Closer to the purchase price the more risk. Further out, less risk but less reward. And i typically do a month out. I buy the stock then immediately sell the call.
Great strategy as this gives you at least Some downside protection if stock moves lower. Plus can always roll. This is every better than selling at the money calls like some people suggest. And the stock drops 10 % percent right away. Then your cost basis is screwed.
Interesting idea. I have trouble following because I am unfamiliar with your option table. I don't know how far in the money the Call is, nor how far OTM the Put is. I usually judge that by looking at the delta.
Great video. Can you please explain the different scenarios at the expiration? If the stock price is continue going up, you let ITM covered call expired, the result would be your shares will be called away at the strike price and you keep the premium sold? If the stock price drops below the strike price when ITM covered call expired, you keep both shares and the premium sold. Am I right? What if the stock price is between the purchase price and strike price when ITM covered call expired, what will you do?
You are correct in your first two scenarios. In your last scenario you have the option of letting it expire, keeping the premium, and getting your shares called away. Or you can buy out of your contract and keep the shares plus the premium left over since the call would be less if the price went down. I typically just let them expire and get my shares called away.
To sell naked puts, you need margin. Margin requirement on TSLA naked put is a max of 50%, or 145/2=72.5. Your ROI is $2.64/72.5= 3.64%, not 1.82%. Also, with the stock at $167.22, if you sell the $145 strike call, your premium of $26.22 is $22.22 in the money. Unless you are willing to go farther out, this strategy is not worth it. Opportunity loss also.
It seems like you found a risk free arb. Instead by buying the stock selling the in the money calls and BUYING the put at the same price as the short call puts you in a risk free arb. Your example you point out the difference that one is better than the other by at least some margin. These are synthetic opposites and if you can pocket more than the cost of carry to expiration you might have free money lying around.
hello, what do you think if we short call first slighly higher than the current stock price, for example a stock currently trading for $135, i short call strike @ $137.5 and take the premium which gives about 3% to 5% return. the next step is set an alarm to buy shares @ $137.5 if the stock does move up, in this case i will have shares to assign if the stock price keep going up, and if it never reaches the strike price, the short call is just free. what do you think of this way instead of buying shares first then do DITM short call? the only downside i can think of is the stock moves above the strike price trigger me to buy the shares then move below the strike price before expiration forcing me to own the stock at a higher stock price
I think you might run into a problem with taxes. In your Tesla example, let’s pretend the stock falls below 145 a share. If you sold a put you would be assigned 100 shares at $145 and have to pay short term capital gains tax on $264. If you sold the covered call you would have 100 shares of Tesla with an unrealized lose of $2222 and have to pay short term capital gains tax on $2638. Assuming that tax is %22, that’s about $580 dollars. You would have to sell your shares by the end of the year to negate this, which come be an even bigger losing position. With the put you just hold the shares for as long as you like.
If you could actually get orders filled at those prices, you could do the covered call and buy the OTM put at the same time and get free money with no risk. Yippee! Except that I've never been able to get such orders filled. I wonder why?
@@notafinancialadvisor69 The strategy is fine, but in an efficient market, the two strategies will have the exact same results. Any slight deviation will be taken advatage of to make risk-free money, eliminating the deviation.
@@notafinancialadvisor69 What I suggested would be risk free. If you could sell that ITM CC and buy that OTM put at the prices in your video, you could make free money with zero risk. Like I pointed out in my first comment.
@@alanjones4358 I gotcha. I miss understood your first comment. I did specify these are after market prices and they aren't reflected accurately accordingly. But you can still do this and collect more premium during market hours.
How does this work if you set a expiration date far out, like a year or so since the return is higher? Do you have to wait until the expiration date for your shares to be called away?
I"m new to options, so I don't understand why would someone risk $16,700 to make $400? I feel like that is worse than walking up to 4 stranger and give them $4k to kick me in the balls! Then say thank you! It reminds me of when I bought a $600,000 house then a year later I got divorced (she got the house) I got the payment. And the judge says to me hey, at least you have your freedom! So I did what every dad would do who loves their kids and want to make sure they have a roof over their heads. I quit my job and filed bankrupt. Hey judge! Now I'm happy. This is why risking more than I could gain makes no sense to me. But I know people make lots of money doing this option strategy, So I want to learn, but my head can't get around the risk factor. What am I missing? Thanks!
Hey Dovey. You are technically risking 16,700, but that is if the stock tanks to zero. That is the only way you lose all of the money. It's like buying the sp500. Technically you are risking all the money you have in it, but the chance of it going to zero is slim. I would check out the channel "Brad Finn" or "inthemoney". They have good options guides.
You are making one mistake in the calculation. the Premium is collected immediately so your rate of return should be calculated on the strike price, not the purchase price since that is all the capital you really have locked up.
How did i only lock up the strike price if that's not the price I purchased the stock at? I had to buy the examples at the current price, not the strike price.
True but the premium collected may also be tied up by choice by the the investor as they may want to keep that money largely available in order to buy back call if price drops due to share price dropping.
you need to calculate the % gain to the capital need. selling Put option, the capital needed is the margin. And the margin is not the same as the stock price, ismuch lower >>> % gain is much higher. am i wrong?
What happens if the stock goes up and above the price we bought the Tesla stock . I guess it was 167 something In my opinion if we buy it back when the stock goes up the premium would have increased giving a loss . Right ?
I can't see this strategy being profitable in any way.... If you're buying a stock at $50/share and selling the $46 CC, the premium is going to be at (or very close to) 4.00 to offset the difference in intrinsic value of the shares to the strike. Your cost basis is still going to be $50/share, because $50(shares)-$46 (strike)+$4 (premium) = still $50. If the stock goes up to $52, the shares will appreciate $2 each, but the ITM CC premium is locked in at 4.00 so you won't get any upside. That's because you've already agreed to sell your shares at $46 with the CC. Rolling out and up will cost more at $52 because when you Buy To Close, the call price on that $46 strike will increase to 6.00 due to the underlying move, so that will wash out any upside. If the underlying drops from $50 to $48 and you sold the $46 strike for 4.00, you're keeping 2.00 of the premium but then losing $2/share by selling for $46. Again, in that scenario its a wash. If the underlying drops to $45 and you sold the $46 strike, you keep the 100 shares and it reduces your basis to $46. Cool, you get to keep the premium & shares, but that still leaves your profit at negative $1 per share.
@Not A Financial Advisor The only situation where I see this strategy pays more than the intrinsic value would be on something as volatile as Tesla. But going a month out on it only has a return on capital of about 0.35% monthly at a reasonable delta using current option chain values. I can easily get that kind of return on a weekly basis with OTM CCs, CSPs, and/or Covered Strangles with less vega risk.
@@24_Delta not true. Can do it with Home Depot and Boeing right now. As stated, I view this more as an income based strategy to collect extra money for (imo) low risk.
@Not A Financial Advisor On Boeing I see $245 (1.12% monthly return on capital) at the 205 strike for 7 July. While its not a bad return rate, I still think it underperforms OTM wheel returns. 1.4% monthly is my target, but I was able to get ~9% last quarter in both my taxable and Roth IRA.
There is one downside to this strategy, you take on more downside risk with your strategy compared to a cash covered put. Let's say a stock is trading at $170. You buy the stock and sell a call at $150, 30 days out. You'll get like $2,400 for that call. Or you could put up $15,000 in cash and sell at put at $150, 30 days out. You'll get like $200 for that put. The stock dives to $100 in 30 days. For your strategy you will lose $6,600, while the guy who sold the put only loses $4,800. Not saying your strategy is a bad strategy, but there are downsides compared to selling cash covered puts.
Can you explain more how and when to roll these things? I’m having a very hard time wrapping my head around rolling. If it expires worthless, you go to sell another ITM or roll to next date and higher or lower strike, seems you get no where near the premium? Seems so complicated so I sell the shares then buy it again and sell so I can keep track of the potential premium, but seems so inefficient this way
You would roll downwards. The point of this strategy (imo) is to collect monthly income. Not try to keep shares. You will most likely get them called away.
Thank you for the interesting analysis. However, we must look at the effects if the stock moving against us. If TSLA moves down to $145 with out of money puts you will get assigned at $145. You can sell ITMCCs from there and your basis will be $145. If TSLA moves down to $145 with in the money covered calls, since you own the stock your basis remains at $167. But the stock price is only $145. You have a large unrealized loss that you don't have with OTMP. So yes, the return is higher, but the risk is higher as well.
it actually makes your cost basis below 145 due to the extrinsic and intrinsic value... cost basis would be 167 buying less the premium sold... and he mentions the idea of rolling the call further down if need be.
Wow! Thank you for this! I’ve been wheeling for years and have NEVER thought of this strategy. The Math adds up! Will try out first on high premium stocks like $RIOT $MARA
Just bought 100 shares of $VZ at $34.81 cost basis. Sold the $34 put exp 9 Jun for $115 which should net $34 premium or 1%. Let’s see what happens but I plan on rolling weekly until called away. If it drops below $34, I would not mind keeping shares as I think VZ is oversold and I’d be happy to collect dividends.
Great video, just a point regarding the calculation of profit on the ITM call, you get 22.22 Back so essentially you are in it for 145 because you got the difference paid back to you immediately. You should actually divide that 4.16 premium on 145 because that’s how much you have left in the trade.
That's incorrect. Your capital required is still $167.00 to purchase the shares and buy into the position. Therefore, $4.16 per $167.00 is your ROC.
Great info. I’ve seen many vids on the wheel strategy but never seen this as a viable income strategy. Thanks for breaking it down.
Thanks Eldeston!
Really good strategy. Numbers speaks for themselves.
BTW this works for more volatile stocks.
Good info...what DELTA are you selling? Or, how did you choose which position to sell?
I typically select strikes around support zones. I don't use a specific delta.
@@notafinancialadvisor69 Thx
@@notafinancialadvisor69your a clown if you don’t use delta selling options smh
@@daimu7971 Tell that to my portfolio 🤡🤡🤡🤡🤡
Seems simple in paper but when the market open I’m sure it’s difficult because the numbers are constantly changing
Hey sonny. I've done this with a trade on IBM. Collected about a half extra percent in premium. You do have to be quick with your execution and you basically have to put your option order in for whatever the current price is. If you don't get filled you do run the risk of the trade not working anymore.
Great comment 💪
Interesting 👍
Puts will be ostensibly cheaper especially at this high interest rate environment. You forget to mention when selling a put all your cash could be in treasury bonds making 5%+ with no risk. If you include interest rate and rho in your calculation, all your examples’s outperformance goes away quickly. Deep ITM calls also have huge bid ask spread in comparison, so….you lose more when you enter the trade.
There’s no free money, and the two strategies should theoretically be 100% equal when all is taken into account. Any inequality in these high volume options, when all factors are considered, will be arbitraged away in milliseconds: if there really was a mispricing like you demonstrated in the video that is higher than the interest rate of borrowing, someone would borrow money, buy the stock, sell the call and buy the put at the same strike, thereby generating risk-free money out of thin air. You really need to understand this before making more videos like this.
I've done this strategy on IBM and QQQ before. Prices arent reflected accurately due to after hours pricing.
Go on your brokerage today and you can do this with Home Depot. This is not free money. There are still risks.
@@notafinancialadvisor69 you didn’t understand what I was saying. Doesn’t matter which ticker or what have you. You simply failed to consider interest rate.
HD currently at 303.6. 7/14 270 C goes for 35.6 ( mid of bid ask), 270 P goes for 0.71. Return of 270 covered call is 2.00, for short P is 0.71. The difference, 1.21 out of 270 for 36 days, annualized is 4.6%, lower than the risk free rate of 1-month Tbill.
So, you could get more money by selling CSP and putting your money in the Tbill than if you sell deep ITM covered call.
@@notafinancialadvisor69 what you found is simply that interest rate is taken into the pricing of options….
@@notafinancialadvisor69 my reference to free money is not regarding your strategy, is regarding the arbitrage that your strategy implies. If your strategy gives covered call an edge over csp that is greater than the borrowing rate, then a truly risk free arbitrage exists, which is free money. I’m not saying that arbitrage is impossible, just fleeting and rare
@@dantong5623 yes with a strike price that low that is true. For my own knowledge, how can you have your money in a tbill and still sell puts? Wouldn't your money be locked away with either the tbill or a csp?
This is a suicide strategy.
If the price of QQQ shoots to 500, you are in huge losses my friend. 😅
Show me the math and I'll believe you
If QQQ shoots to 500 you get the return that you hoped for. No loss.
This strategy is good only if the option expires ITM. For your TSLA example, what if on expiry TSLA's price is $140? You'd keep the stock at loss, and if you sell further ITM Call, the premium wont cover the loss!
True. Same like selling puts. You get assigned and are at a loss for a bit. Can sell CC at breakeven point or further down depending how badly it blew through the strike price.
@@notafinancialadvisor69 so it seems to me then that you can run the wheel like this. In which case, opening a wheel is something like picking a target price on a stock, buying the stock, and selling calls at the target price, and buying it back as needed.
This is exactly what you should be worried about, if (when) TSLA tanks next you'll be losing 30-60% of your position and never get in the green again for many years or likely forever. Not worth the risk for a potential 3% one-time gain imo
@@youtuber9991 While this is true, you can always write calls at a lower delta to reduce the basis on the TSLA shares, and roll the calls should they ever be tested. TSLA is a SPX stock, the chances of it tanking and never recovering is immeasurably low. Plus, Elon's wealth is tied into this stock. You can bet that he'll do something to cause investor stir resulting in the share price going back up.
To deal with this and make more income, you can roll down-and-out prior to expiration if you're in jeopardy of being called out.
Sorry if you mentioned this and I missed it, but how much of that 4.16 ITM cc was extrinsic? Because that 2.64 put was all extrinsic. So unless I’m missing something, if Tsla stays up or goes sideways, your profit on the put would be 2.64 on the put, compared to price minus the ITM cc extrinsic value. Would the ITM cc still be more %? Thanks and God bless!
The 4.16 is all extrinsic value. That was the difference in subtracting the 26.38 (premium) with the intrinsic value of the call 22.22 (stock price minus the strike price).
Great video. The only other detail I would add, is that while selling cash secured puts, you do also get paid interest by your broker on the cash, for Interactive Brokers that's .50% below current Fed funds rate. Selling in the money covered calls still has the edge, but you do get the interest with cash secured puts.
I will have to re do the math in a future video. I did not take that into account
Rather than buy the stock outright, I tend to sell an at the money put. Collect maximum premium and maybe or maybe not get put the stock. However if I do get put the stock I then sell the deep in the money call.
One thing you should mention is the delta of both the $145 short put and the $145 short call. As delta approaches 1.0, the extrinsic value within the option premium goes to $0. This is an important piece of information regarding this video. The extrinsic component of the premium is maximized at delta ~0.5, and writing calls near this delta will always be more profitable than writing calls further ITM at say delta ~0.25.
At Fidelity I get 5% on my cash, so by not purchasing stock I am earning interest. This will make up the difference on the higher premium collected by selling a covered call. Plus u dont have the risk by owing the stock and losing value.
I made a spreadsheet in the updated video where you can calculate if it's better to sell puts or ITM Covered Calls depending on the current savings rate :)
If you monitor the expire dates, and dividend dates carefully, you could simply roll your short call side ways the day before expire or on expire day and keep collecting premium. If you know what you doing you can substitute leaps for the stop and get between 2.5 times to 4 times the return You can also lose your shirt.
What about if you do not own the stock, but own a ITM call?
Interesting approach. How does theta decay affect the ITM CC strategy? If TSLA dropped to $160 with a week remaining in the contract, would an equivalent amount of extrinsic value have burned off compared to a an OTM CSP at $145?
I’m going to open trades for both strategies at the same time on something cheap and volatile with high premium like RIOT or MPW and see how each trade behaves with price movement.
Thanks for the video, great analysis!
Tell us what you find.
Honestly I couldn't tell you. And I would also love to hear how it went.
Yes, synthetically, a covered call is the same as a short naked put.
Interesting approach. I imagine doing this with an approaching ex date would complicate the trade. MPW has a big dividend while TSLA not.
@@2023Red no doubt. Different dynamics and IV catalysts for those companies for sure.
Wouldn't itm cover call be bearish and the cover put bullish?
IMO if I am bearish on a stock why am I holding it? It's just a decent way to collect more money if you were going to sell puts anyways.
Just FYI, if you don’t use Robinhood you can get much better margin use selling outs from most other brokers.
Selling puts with the better margin use is ultimately a better strategy.
If you really want to boost the return % of this strategy, create an ITM call debit spread rather than buying the shares.
That will use less margin and get you a higher return than selling cash secured puts.
Very possible! I've just gotten burned with ITM call debit spreads before. I don't utilize them too much anymore.
And thanks for the tip regarding Robinhood. I am just a Robinhood whore since I mostly trade at work on my phone.
You make interest (nearly 5% at fidelity) on the money backing the put, that should be factored in, but overall your point still is valid.
I made an updated video considering the current interest rates and you can use a spreadsheet to calculate which is better :)
What what?
Deep ITM option have little-to-none extrinsic value. Or from another perspective, options with high delta acts almost like 100 shares.
Selling deep ITM calls is basically a short position with a little premium. Combined with shares, you are exactly balanced.
I don't understand why I should do this instead of selling ATM calls
I view it as a low risk way to collect income. If the stock tanks you still have a high chance of making money or breaking even. If you sell an ATM call you breakeven price is much higher.
What delta are you using via itmc
I don't use a specific delta. Just how much risk I want to take on is how close I go to the strike price.
This works because tsla has call skew. A stock with put skew would make selling the put a better ROI
Do both but use 10 - 15delts so your chance winning could be higher
💪
The problem with selling deep in the money covered calls is if the stock drops your just losing money. Your hoping your premium exceeds the drop in price. The examples you gave didn't show any movement in the stock price.
After hours example. Will have a live example in a couple weeks. I generally dont do these during opening market since things swing around so much
I’m sorry but your numbers are wrong. Before selling options people should have a good understanding how they work.
Any clarification would be great.
@@notafinancialadvisor69 it’s just all hypothetical. Selling the put wound use only about 5k comparing to buying 100 shares and selling the call. The risks would be completely different. If that works for you then I guess it’s ok. I know there are many ways to do things. I think it would be easier to sell a iron condor. Even though I’m not huge fan of them but a least it’s limited risk and probably good starting strategy for people starting out. Just my thought.
The ITM option trade percent is incorrect. On the first example of TESLA the stock price is $167.22 with a strike price of $145.00 and option premium of $26.38. I agree the gain is $4.16; however, the amount invested is not $167.22. It is the difference between the stock price and the option premium which is $140.84 ($167.22 - $26.38 = $140.84). The correct answer is 2.94% ($4.16/$140.84 = 2.95%). This is better than what you show. The QQQ example is also incorrect.
Yes, but you still need $167.22 (x 100) to execute the trade which is why I divide by that number. If you don have that amount you cannot execute the trade so, IMO, it's irrelevant using $140.84.
You use a buy write and this eliminates this issue as you only need the difference between the purchase price and the option premium.
@@OptionsCB In my example I purchased the stock price. That is why I used the purchase price. I did not execute the trade without purchasing the stocks. That it why I use the amount of capitol I put in. You can use your own calculations if you want. But I will be sticking to my math :)
I've been doing this in my IRA because I don't have margin nor level 3 options and its not worth holding cash in the account in reserve at .015% interest when selling puts. So I just do short term in the money covered calls on stocks going ex-dividend in the next few days. Thanks for the video!
😭 what a sad interest rate. I'm glad it's been working!
@@notafinancialadvisor69 Yeah, I could switch away from e*trade, or eventually once I get more options trading history built up, request level 3 options to reduce the CPP needed by doing put credit spreads.
For ITM CC, I understand that the permium will decrease when the price drops, so when is a good time to roll down and out? When the premium gets below the ATM premium (9.33) or the CSP premium(2.64)? In the tsla example
Really interesting strategy, just not sure if profits are as high if you trade with a margin account ... too bad it looks really intriguing
Try it out a couple times and see what you think
I just spoke to TDA about margin interest rates and it is currently expensive at 9.85% at
Robinhood is actually one of the cheapest I found. You do have to pay $5 a month for their Gold membership, but I make that back with the cash earning interest in the account.
Your % return is wrong. A buy-write on Tesla still only requires $14,500. Same as selling a CSP.
How is it wrong?
You would have to buy Tesla at the current price so it will cost you $16722 but I agree the % return may not quite as much because the prices are much wider in ITM call compared to OTM put and not sure if that prices shown is the mid price which may not be accurate with the market closed and may not get filled at that price but even at 0.7% difference I am not sure it's worth it as you will lose money on the stock if it goes down and may get called away at a lower price Ideally you would place this trade in an overbought condition so it will get called away at a higher price from where it was bought
I am glad you are not a financial advisor. A real financial advisor would keep this advice to himself. Two questions: (1) how do you pick the strike price relative to the current stock price, (2) how do you pick the expiration date of the call option relative to the date you purchased the stock?
That's why the channel is "not a financial advisor". I'm just a dude 😎
I just do it on how much risk I want to take on. Closer to the purchase price the more risk. Further out, less risk but less reward.
And i typically do a month out. I buy the stock then immediately sell the call.
Great strategy as this gives you at least Some downside protection if stock moves lower. Plus can always roll.
This is every better than selling at the money calls like some people suggest. And the stock drops 10 % percent right away.
Then your cost basis is screwed.
I generally don't do these at market open for that risk.
If I do not have the required capital, can I buy an ITM Call instead of buying the stock outright before selling the OTM call?
Honestly I have no idea. You can do that with the PMCC. But I never attempted with a shorter timed call.
Interesting idea. I have trouble following because I am unfamiliar with your option table. I don't know how far in the money the Call is, nor how far OTM the Put is. I usually judge that by looking at the delta.
These are just examples. I didn't choose a specific delta. I just chose the strike price and examined the out vs and ITM cc
You confused buying and selling Covered calls. Plus the action takes two weeks to complete, one full week to be assigned.
99.999999999% sure you are wrong my friend.
Great video. Can you please explain the different scenarios at the expiration? If the stock price is continue going up, you let ITM covered call expired, the result would be your shares will be called away at the strike price and you keep the premium sold? If the stock price drops below the strike price when ITM covered call expired, you keep both shares and the premium sold. Am I right? What if the stock price is between the purchase price and strike price when ITM covered call expired, what will you do?
You are correct in your first two scenarios. In your last scenario you have the option of letting it expire, keeping the premium, and getting your shares called away. Or you can buy out of your contract and keep the shares plus the premium left over since the call would be less if the price went down. I typically just let them expire and get my shares called away.
Thank you for your explanation!@@notafinancialadvisor69
I’ve never tried to sell deep in the money covered call. Do you just let your covered call signed at the expiration day as it’s in the money?
Yep. Just let it expire and your brokerage will sell the shares
I'll have to paper trade it for some time, but sounds great
Let me know how it goes :)
Good video but you forgot to add your margin interest. I think you redo your assumption with the extra cost. Thanks
Good point. But you don't have to utilize margin to do this strategy. Only if you want.
To compare CSP and CCW, can’t use the same strike price, but use the same option value. In theory, they are identical in the performance profile.
To sell naked puts, you need margin. Margin requirement on TSLA naked put is a max of 50%, or 145/2=72.5. Your ROI is $2.64/72.5= 3.64%, not 1.82%. Also, with the stock at $167.22, if you sell the $145 strike call, your premium of $26.22 is $22.22 in the money. Unless you are willing to go farther out, this strategy is not worth it. Opportunity loss also.
way better than puts. Thanks for the video
Glad you found it useful :)
Subscribed!! Learned something new about buy/write ITM
Thanks James!
It seems like you found a risk free arb. Instead by buying the stock selling the in the money calls and BUYING the put at the same price as the short call puts you in a risk free arb. Your example you point out the difference that one is better than the other by at least some margin. These are synthetic opposites and if you can pocket more than the cost of carry to expiration you might have free money lying around.
hello, what do you think if we short call first slighly higher than the current stock price, for example a stock currently trading for $135, i short call strike @ $137.5 and take the premium which gives about 3% to 5% return. the next step is set an alarm to buy shares @ $137.5 if the stock does move up, in this case i will have shares to assign if the stock price keep going up, and if it never reaches the strike price, the short call is just free. what do you think of this way instead of buying shares first then do DITM short call? the only downside i can think of is the stock moves above the strike price trigger me to buy the shares then move below the strike price before expiration forcing me to own the stock at a higher stock price
I think you might run into a problem with taxes. In your Tesla example, let’s pretend the stock falls below 145 a share. If you sold a put you would be assigned 100 shares at $145 and have to pay short term capital gains tax on $264. If you sold the covered call you would have 100 shares of Tesla with an unrealized lose of $2222 and have to pay short term capital gains tax on $2638. Assuming that tax is %22, that’s about $580 dollars. You would have to sell your shares by the end of the year to negate this, which come be an even bigger losing position. With the put you just hold the shares for as long as you like.
You don't pay taxes on losses. The only thing you would pay taxes on would be the total profit. Losses are deducted
Interesting! Thanks.
New subscriber.
Thanks for the sub Ray!
excellent presentation !!!!!!!!!!!!!!!!!!thank you !!!!!!!!
Glad you liked it!
Simple, elegant, and powerful. Respect !
agreed.
terrible explane the risks
True
thank you..... great explanation
Glad it was helpful!
Selling a $145 Put requires more than $145. The return percentage of selling a Put made no sense.
You have to times it by 100 for the full contract.
If you could actually get orders filled at those prices, you could do the covered call and buy the OTM put at the same time and get free money with no risk. Yippee! Except that I've never been able to get such orders filled. I wonder why?
After hour prices don't reflect accurately. But the strategy still stands and I've done it multiple times with IBM and QQQ. Good eye though 💪
@@notafinancialadvisor69 The strategy is fine, but in an efficient market, the two strategies will have the exact same results. Any slight deviation will be taken advatage of to make risk-free money, eliminating the deviation.
@@alanjones4358 this isn't risk free though. It has its risks.
@@notafinancialadvisor69 What I suggested would be risk free. If you could sell that ITM CC and buy that OTM put at the prices in your video, you could make free money with zero risk. Like I pointed out in my first comment.
@@alanjones4358 I gotcha. I miss understood your first comment. I did specify these are after market prices and they aren't reflected accurately accordingly. But you can still do this and collect more premium during market hours.
If rhe strike you sold is $20 under the share price ,i wouid exercise the contract and you lose$20 per share?
Yes, but the premium will make up for it in these examples and can give me a small profit as well.
Interesting. What do we NOT want to happen when employing this ITM covered call strategy?
Fall below the strike price. Similar to selling a put
@notafinancialadvisor69 gotcha and do you know how far out in DTE is best for this particular strategy?
@@ts4426 you need about a month out for it to be more than selling puts
@@notafinancialadvisor69 thank you for your help, sir!
How does this work if you set a expiration date far out, like a year or so since the return is higher? Do you have to wait until the expiration date for your shares to be called away?
Thank you
Thanks for your comment David 😊
Good explanation
Much appreciated :)
What would this strategy be called?
I don't know if it has another name besides an In The Money Covered Call
GTFO get the* out of here strategy.😉🍷
I"m new to options, so I don't understand why would someone risk $16,700 to make $400? I feel like that is worse than walking up to 4 stranger and give them $4k to kick me in the balls! Then say thank you! It reminds me of when I bought a $600,000 house then a year later I got divorced (she got the house) I got the payment. And the judge says to me hey, at least you have your freedom! So I did what every dad would do who loves their kids and want to make sure they have a roof over their heads. I quit my job and filed bankrupt. Hey judge! Now I'm happy. This is why risking more than I could gain makes no sense to me. But I know people make lots of money doing this option strategy, So I want to learn, but my head can't get around the risk factor. What am I missing? Thanks!
Hey Dovey. You are technically risking 16,700, but that is if the stock tanks to zero. That is the only way you lose all of the money. It's like buying the sp500. Technically you are risking all the money you have in it, but the chance of it going to zero is slim. I would check out the channel "Brad Finn" or "inthemoney". They have good options guides.
400 bucks is beer money
You are making one mistake in the calculation. the Premium is collected immediately so your rate of return should be calculated on the strike price, not the purchase price since that is all the capital you really have locked up.
How did i only lock up the strike price if that's not the price I purchased the stock at? I had to buy the examples at the current price, not the strike price.
True but the premium collected may also be tied up by choice by the the investor as they may want to keep that money largely available in order to buy back call if price drops due to share price dropping.
Awesome!
😁
you need to calculate the % gain to the capital need. selling Put option, the capital needed is the margin. And the margin is not the same as the stock price, ismuch lower >>> % gain is much higher. am i wrong?
in other words, you have the wrong cost basis in the put side...
in other words, in your tsla example the margin will be aroung 6000$ and the gain 246$ = 4.1%
Calculate for how much capitol you need to sell the put for. That's the selected strike price x 100 for the total amount
What happens if the stock goes up and above the price we bought the Tesla stock . I guess it was 167 something
In my opinion if we buy it back when the stock goes up the premium would have increased giving a loss . Right ?
That's if you buy it back. Or just let it expire, keep the cash you got from it, and you lose the stocks.
@@notafinancialadvisor69 loose the stocks bcz it is certain that the call will get assigned?
@@karankatiyar5414 If the stock price is above the strike price, yes you lose it.
@@karankatiyar5414 it's never certain it'll get assigned but likely
I can't see this strategy being profitable in any way.... If you're buying a stock at $50/share and selling the $46 CC, the premium is going to be at (or very close to) 4.00 to offset the difference in intrinsic value of the shares to the strike. Your cost basis is still going to be $50/share, because $50(shares)-$46 (strike)+$4 (premium) = still $50. If the stock goes up to $52, the shares will appreciate $2 each, but the ITM CC premium is locked in at 4.00 so you won't get any upside. That's because you've already agreed to sell your shares at $46 with the CC. Rolling out and up will cost more at $52 because when you Buy To Close, the call price on that $46 strike will increase to 6.00 due to the underlying move, so that will wash out any upside.
If the underlying drops from $50 to $48 and you sold the $46 strike for 4.00, you're keeping 2.00 of the premium but then losing $2/share by selling for $46. Again, in that scenario its a wash.
If the underlying drops to $45 and you sold the $46 strike, you keep the 100 shares and it reduces your basis to $46. Cool, you get to keep the premium & shares, but that still leaves your profit at negative $1 per share.
Yes that is true if you did math with a random example 😉
It's an income collection strategy. Nothing else as I mentioned in the video
@Not A Financial Advisor The only situation where I see this strategy pays more than the intrinsic value would be on something as volatile as Tesla. But going a month out on it only has a return on capital of about 0.35% monthly at a reasonable delta using current option chain values. I can easily get that kind of return on a weekly basis with OTM CCs, CSPs, and/or Covered Strangles with less vega risk.
@@24_Delta not true. Can do it with Home Depot and Boeing right now. As stated, I view this more as an income based strategy to collect extra money for (imo) low risk.
@Not A Financial Advisor On Boeing I see $245 (1.12% monthly return on capital) at the 205 strike for 7 July. While its not a bad return rate, I still think it underperforms OTM wheel returns. 1.4% monthly is my target, but I was able to get ~9% last quarter in both my taxable and Roth IRA.
@@24_Delta that's awesome.
There is one downside to this strategy, you take on more downside risk with your strategy compared to a cash covered put. Let's say a stock is trading at $170. You buy the stock and sell a call at $150, 30 days out. You'll get like $2,400 for that call. Or you could put up $15,000 in cash and sell at put at $150, 30 days out. You'll get like $200 for that put. The stock dives to $100 in 30 days. For your strategy you will lose $6,600, while the guy who sold the put only loses $4,800. Not saying your strategy is a bad strategy, but there are downsides compared to selling cash covered puts.
17000 - 2400 = 14,600 risk. The covered call still has less risk on the downside.
@@taon4835 Yep you are correct, I stand corrected.
Can you explain more how and when to roll these things? I’m having a very hard time wrapping my head around rolling. If it expires worthless, you go to sell another ITM or roll to next date and higher or lower strike, seems you get no where near the premium? Seems so complicated so I sell the shares then buy it again and sell so I can keep track of the potential premium, but seems so inefficient this way
You would roll downwards. The point of this strategy (imo) is to collect monthly income. Not try to keep shares. You will most likely get them called away.
excellent illustrations. have you looked at tax angle for the capital loss and option profit?
Tbh I have not.
FYI,
your cost basis is still $145 due to the $26.38 that you got back for selling the call. $4.16 /145 = 2.87%
How is it my cost basis if I spend $167.22 per share?
@@notafinancialadvisor69 if you would have done a buy write the 100 shares would have cost you $145 and you would have $4.16 left $4.16/145 = 2.87%
Thank you for the interesting analysis. However, we must look at the effects if the stock moving against us.
If TSLA moves down to $145 with out of money puts you will get assigned at $145. You can sell ITMCCs from there and your basis will be $145.
If TSLA moves down to $145 with in the money covered calls, since you own the stock your basis remains at $167. But the stock price is only $145. You have a large unrealized loss that you don't have with OTMP.
So yes, the return is higher, but the risk is higher as well.
Which is not correct.You're missing that ITM call has a hefty intrinsic part, which makes your cost basis essentially the same - 145.
it actually makes your cost basis below 145 due to the extrinsic and intrinsic value... cost basis would be 167 buying less the premium sold... and he mentions the idea of rolling the call further down if need be.
Thank you. I stand corrected. 👍
Wow! Thank you for this! I’ve been wheeling for years and have NEVER thought of this strategy. The Math adds up!
Will try out first on high premium stocks like $RIOT $MARA
Would love to hear how it went
Just bought 100 shares of $VZ at $34.81 cost basis. Sold the $34 put exp 9 Jun for $115 which should net $34 premium or 1%. Let’s see what happens but I plan on rolling weekly until called away. If it drops below $34, I would not mind keeping shares as I think VZ is oversold and I’d be happy to collect dividends.