NOTE: Some viewers have highlighted that in comparing the yield of VOO and XYLD, I used the last-twelve-month yield for XYLD and the 30-day yield of VOO. To clarify, the two are both annual yields (the 30-day figure is annualized, as highlighted by Vanguard on the ETF landing page). Nonetheless, I apologize for the confusion, as it would have been more accurate to compare the LTM yield for both. For reference, the LTM yield for VOO was 1.38% at the time of video posting, compared to the shown annualized 30-day yield of 1.39%.
Understood, but can you explain why the yield for VOO is 1.39% when the screenshot you show at 11:58 shows that it returned 22.83% over the previous year?
@@wilsonli5642 Sure thing - the 22.83% is TOTAL return. YIELD is just the income paid by the investment, whereas TOTAL return includes both the position's yield and price appreciation. Think of yield as being like the stock dividend, and price appreciation being how much the stock has increased in price.
It depends how much you paid for the underlying security. For instance, If you bought the stock at $10 and you ride the trend towards $20 while collecting premium 10 times then letting go of the stock once it doubled is not a bad strategy 😉 😮
The "bottom line", being all that really matters...Especially for those not living in moms basement, and actually having to WORK for their $!!! These are a great investment tool for those that want to keep more of the $ they make, while not having to stare at a screen all day...They also pay monthly, which is also an attractive option...To think: If only banks payed fair rates, not many people would bother with markets...
Your Content Stands Out In A Refreshing Way! I Truly Appreciate The Absence Of Background Music In Your Videos, As It Allows Your Message And Personality To Shine Through Without Distractions. Keep Up The Great Work!
I totally agree with you. I trade covered calls for a year and decided to stop. It underperform buy and hold for a long shot... there is truly no free lunch out there
Covered calls can be used safely if one intends to get out of the position anyway but have some time before they intend to sell. Selling CCs in the money would effectively be selling it now but getting paid the intrinsic value later in exchange for a premium. Sure, the stock might rise while the contract is in effect, but that's no different than selling now and watching the stock go up without you holding it. You could even sell barely in-the-money CCs to try and squeeze some more premium out potentially multiple times before you finally let the stock go. The point is to put yourself in a position where you're satisfied with either outcome. For me, it's almost a counter-FOMO strategy to get over the mental hangup of selling something you've been holding onto for a long time.
@@IndexInvestingWithCole that's the same risk you have for holding any stock for any time period. But as a consolation prize, your CC is likely out of the money, you get the premium, and you can sell again. And you have lowered your break even price, giving you more leeway for the next CC. All this assumes that you can the time to play around again before you need that money from the stock's intrinsic value. If you don't, then sell a really deep in the money CC so you have more security. Folks will buy those super deep CCs for LEAP options, but those need a few months time at least. But if you don't have the time or risk tolerance, then just sell it on the market now.
@@IndexInvestingWithCole Look into ‘rolling out’ the position. You would close out the call and either sell and reap the loss on the equity or short another call. There is a falling knife danger though. And it could take a long time of bag holding and shorting to turn it around. (High tech speculation companies are the worst about this) When beginning, pick a stock that has stable 30-90 day trends and trades enough options that you’ll get decent executions, And keep reasonable expectations. It is a battle of attrition, shorting out of the money calls and waiting. It will feel like a slow process if you watch everyday.
If you want to sell you either expect the price to go down (so you want to sell now, not later) or you want the money now (and can't wait). I think I don't understand the scenario you're discussing.
@@ricardoamendoeira3800 there are situations where you can wait a bit like getting ready to take a distribution from a retirement account or making a payment in a few months. That's where selling in the money CCs can work. Again, it's only if you have the luxury of time. They are a minority of situations but they are there.
I did a collar strategy of selling weekly calls with strikes at/near market prices (income) while also buying puts below market (insurance). The idea was to have the stock(s) called away from me each Friday, collect the premium less the premium I paid for the puts. The goal was to find annualized returns above 12%. After four months, I made about the same amount of money as buying and holding the index, so I switched over to that. It [wasn't] worth the time constantly looking for the good deals.
That's a really stupid strategy. You don't earn any income because you're paying for the puts and don't get any return because you sold calls. This is a long stock plus a synthetic short position so you have no position in the underlying stock while also pay commissions and don't earn interest on your capital
Good video in general. Not a fan of covered-call ETFs, but big fan of writing calls on the positions I own. Writing calls is for advanced traders/investors. One needs to learn which underlying to pick, how to manage the positions, understand the greeks (there is jargon involved), adjusting your deltas, doing ratios, rolling out etc to be successful. Basically, it requires knowledge, time and energy that most people don't have. But if you do, then the strategy can be a lot more profitable on the long term than simply holding positions. Here is one example from my portfolio: Bought 400 share of SU in Nov 2022 for an avg price of 46,96 CAD. The stock closed this Friday at 44,58. So far, I have made a profit of 18,09%: 1050.00 in dividends and 3x as much (3125,75 to be exact) in collected premium. But again, it takes time and knowledge and therefore it is not recommended for everyone.
I was looking for a comment like this. I agree and use covered calls to make a lot of cashflow from my portfolio. There was no mention of rolling options to prevent them getting assigned, but I guess that’s a bit too advanced for this video.
Since the video popped up again in my playlist, here is an update on that trade that is still on 7 months later. Currently up 34,6% (since the beginning). Without the CC, the total return thus far would be 16,8%. I keep rolling the calls; sometimes for a debit (if deep ITM), but the vast majority of the time, I roll for a credit. My current strike price is 54 (Nov exp) and the stock trades now around 50,50. Writing this on Sept 22 2024.
That is just one anecdotal position - can you (honestly) compare the total return of all your active trading efforts for your whole life to what you would've gotten by just holding VOO for the same capital outlay and duration?
@@formalshorts8561 I can’t say for a lifetime because I have only been trading options for around 2 years. I can say that what I make with options is a bonus on top of what I make in capital gains from holding stock. So yes it’s more profitable to hold a stock and sell calls, than to just hold the stock.
I really appreciate these videos. I don't do day trading, but it's helpful to understand these concepts to get an idea of who's talking crap and who has reasonable investment advice.
Excellent video for those who aren't yet experts in options trading. This explains the Covered Call much better than almost any other edu video I've seen so far. Why? Because Richard explains the shared risk/return/expectation of both parties -- not just you, selling the CC, but also that of the person buying it. Great "reality check."
I've had friends find out the hard way that covered calls as an ongoing strategy is not all that it is cracked up to be. If the market surges, your gains get capped as your stock gets yanked away. If they market crashes , you lose just a few percent less than just buy and hold. Plus, after eating the big loss, you have less money to buy stocks for covered calls. A friend of mine was crushing it with covered calls from 2005-2007, then when the GFC hit, he lost close to 3/4 of his capital. I think the best use is when you have a stock that you like, but it has gotten overpriced You can write covered calls. If you get called out, you don't mind because you wanted to sell anyways. If the stock goes down, you got some income to offset the loss on a stock you don't mind owning.
I could see it make sense doing covered calls on overpriced stocks that you're sitting on big short term cap gains for. But otherwise you're better off selling. Cc is like any strategy just about modifying your risk exposure as you said.
I've seen some advice from someone on r/options that says to only use covered calls on more stable stocks and that you can use this strategy to get out of the position.
@@BestWOTReplayss There is no such thing as a stable stock when the market tanks 30-50%. In the GFC, even blue chip like P&G, Pepsi, Colgate, and J&J went down hard
How did your friend lose 3/4 of his capital doing covered calls during the GFC? If anything he would be making a killing on covered calls. If you are just talking about the paper losses on the underlying stocks, then it doesn’t matter. Don’t sell and he would have been fine after 10 years later.
This is one of my favorite semi-passive methods for income generation. As others have said however, it can flip on you quickly. I recently sold several CCs on my PLTR shares for earnings where I believed the statistical odds of a 30% gain in one week was close to nil..... ended up having to buy to close and eat the difference because it rose around 50%!
Great comment! Have you considered writing a trailing stop on the CC? This would limit your downside. Been there and unfortunately done the same thing.😉
I'm bullish for long term and didn't want to lose my shares with my low cost basis. If the contract was to go in the money, they technically could have been exercised prior to expiration.
Well this is good timing. A month ago I sold a CC on VTI exp 2/16/24 $250 strike. Been on a roller coaster all week worrying it’d execute. I did not actually want to sell the position! It did expire worthless, but it’s a lesson learned.
Even if the option gets exercise if you really want back in VTI, immediately look at doing the cash secured put you now have the funds to buy and then you can collect another premium And you have the possibility to get in at a lower price and the premium to even offset any potential loss if it goes lower.
You do NOT want to sell an option that you don't want to be exercised, because it EASILY could, especially if it's near the money. Much better to sell an OTM option on PART of a position such that if it gets exercised, you're happy about the overall position. I like to sell a covered call AND a put on the same stock. One or both of them will expire worthless (especioially when the put strike is lower than the call strike), I can roll the leg that is ITM if the stock doesn't move too far, and worst case, my long position rises meaningfully, OR I get the opportunity to sell another OTM put on a meaningully cheaper stock I want to own more of. The key thing is TO HAVE A PLAN and to KNOW WHAT YOU'RE DOING. Some books on Amazon are good, and there's lots of decent reviews on option books there.
Love the video! I agree that on a numbers game CC ETFs will underperform in the long run. However, I like to view investing through a second lens of personal happiness. With a strategy that focuses on income, you gain more real life options by increasing your cash flow. An example of this might be allowing yourself to take a nice vacation, or perhaps buy something that can be used to increase your happiness on a month you don't wish to DRIP. Instead of going the total return approach and having to wait until you are too old to enjoy your accumulated wealth, you can enjoy life while in good health and with more energy. This is my philosophy and reasoning for holding CC ETFs. Although, I prefer an ETF that only writes calls on a portion of the fund. That way I to still get some exposure to the upside. Keep up the great work!
Bang on!! That's exactly my sentiment. Who wants money when they are toooo old to actually enjoy it? What I'm doing is finding cc etfs that have a lower coverage ratio... Ie 33 % to 50% coverage... That way half or more of the portfolio has the potential to grow or perserve the capital all while earing over 10 % monthly paying yield. What's not to like?? Best of both worlds in my opinion. I could care less of the traditional measure of paper gain that can't actually used or lived on until an old age retirement plan.
Yes, I call it the human side of investing. You sacrifice some of the money (gains) to have a lifestyle that makes you happy and fulfills you. Math is important in investing, but life isn't about math.
I've been selling covered calls on BAC stock since 1998, they've never been called away, and I've made enough money that my original cost-basis is negative.
Agreed. Selling Puts right now especially when volatility is higher and people are scared means that overall puts are overpriced due to investors trying to hedge downside risk.
I have been following you ever since the start of the pandemic back in March 2020. You never cease to amaze me. Thank you Richard. Sending positive vibes from New Brunswick, right next to the Gaspe!
I've seen the best and worst of this strategy. I wheel calls and puts in my Roth IRA so no worries about tax implications there...but I have definitely been caught on the wrong side of huge moves up and down and have had my share of capped gains and unrealized losses. But it really is amazing to be able to sell calls and puts to the YOLO crowd and know that statistically speaking, you're more likely to come out on top as a seller rather than a buyer. And I have certainly put the premiums to good use. There are large positions in my portfolio that were purchased exclusively with covered call and put premiums. Anyways I acknowledge the risks but overall I've had great success with this strategy.
Thank you Richard! Please do more of these educational videos, it especially benefit the younger crowd that now have access to Robinhood accounts. Ignorance is dangerous but incomplete knowledge is even more dangerous, as it leads to people to confidently make bad assumptions and take risks that can cost them everything.
i just keep 75% invested and do cash secured puts at support with the rest of 25%. Cut my loss at 100% of my premium, generally there is a bounce back from support which easily gives 70% PE depreciation. Working like a charm. Don't wait, i waited for 3 years, i wish i had started this early. Don't shy away from cutting your loss in cash secured puts. It works 3 out of 4 times.
Yes, same here. Great strategy, I only write on stocks that I want to own at the strike I want to own them at. Kinda like getting paid to purchase a stock I want to own at a price I want to buy it at. I use CC to exit a position, like getting paid to sell stock I want to sell @ the price I want to sell it at. GREAT COMMENT. 👍🏻
Thanks for covering this. I asked the options reddit if they would play a game where on a dice 1-5 gains a dollar and 6 loses 6 dollars the poll was over 70% yes.
Good point. You can fix some of the missed upside by rolling your covered call out and up. But it is not a set and forget strategy. I would say if you start with options you need to understand it is a daily and often multiple times per day job. If you cant do that just stick to buy and hold. Options can go wrong really fast if you are not paying attention and know how to fix a position.
I’ve just recently started using covered calls in my portfolio but I only use them on positions I’m looking to sell as is. I don’t expect these positions are going to drop radically hence why I’m not just selling them outright. I feel covered calls make sense here as I can generate a little extra income but I won’t be mad if I lose my positions
From a value investing perspective, I think it makes more sense to just sell that position and use the capital on a stock you believe to have better future prospects. What makes you satisfied to stay with a company that you don't believe will appreciate in value?
I generally only sell a covered call or cash secured puts when I'm largely indifferent to the outcome. The more you need to be able to predict the future to accomplish your goals, the less I consider derivatives a good idea.
I spent like 4 years thinking I was a genius stock picker while my 401k was just in an S&P sitting and growing. After 4 years I saw I was not a genius and have a schedule to buy an S&P every 2 weeks no matter what is happening. This has been so….much….better….
Great video! Didn't know about the distributions being different but that made it click for me why risk is so hard to measure. Regarding being the house: always thought that point was a bit odd. In gambling the house gets to set its own fees and payout schedule. Whereas with options you're subject to whatever the market sets the premiums at, having to take more risk to get higher premiums. After cuts from contract fees, PFOF, etc (or bundled as a fund expense) it seems like it'd be more accurate to say it's like a game of poker between two players who each paid a fee to their brokers, market makers, and/or fund managers.
You're still the house. You can choose whether you sell the CC or not. If the rate and schedule is unattractive, you wait. The only real difference here is the casino is only open when the house wants it to be.
@@ZaerkiYou can't consistently sell CC's with a positive expected outcome (statistically speaking), the market won't buy them. So no, you're not the house, unless you being the house is you being a casino that is always waiting for someone to enter but no one ever does.
It sounds more like a player finding an edge over the house rather than being the house. I mean if someone has a strong reason or some form of insight into mispricing, then more power to them. But unlike the "house" comparison there isn't a statistical guarantee to win in the long term vs buying and holding. Just looks like both sides paying a small fee to hedge their risk in opposite directions.
Great insight, I have been doing calls for a year or so, the pain of missing out on huge upside is never really discussed by those championing call writing. In Nov 22 I bought meta for 130, sold 2 calls at 170 one year out and got crushed as it went up to 400. Yes, I made 8k but missed out on much much more if I just bought and held. You also quite rights point out that all premiums are short term, so get the worse tax treatment, also there is always a fee. I enjoy doing calls and will continue, but ultimately it is bearish in nature. It feels weird when your call goes to zero, you feel like you have won the game, but over that time your equity has possibly taken a hit.......you can't celebrate both outcomes. Regards and thanks for the content
@@tonytate2197 yeah mate called away, I rolled out a couple of times from 150 to 170, but they were like a runaway train, I made money but left so much on the table…..ah well, win some lose some
I've been doing the wheel strategy with selling cast secured puts, rolling and covered calls for a few years now. It's been nothing short of life changing. You have to be disciplined though, I started off with about 3 rules when selling contracts now I have about 15 that I follow before I sell one. The house does indeed always win....some times lol.
It's the way I used to generate some additional revenue while trying to exit my excessive MSFT position to diversify our portfolio. Pulled in a few thousand while eventually having the calls exercised, which resulted in a much more diversified portfolio as I purchased a variety of mutual funds with the resulting cash.
I personally did covered calls on a select high risk investment. The option themselves worked in my favor with the money I generated from selling options (covered calls / buy write/ cash secured put). However the investment themselves have at least at the moment have dropped, resulting in a net loss. In this case I would have been better using the classic invest in basic index funds and ride them out. While options are useful, normal people should avoid them due to the risks highlighted in the video and the time used to do the pricing correctly. And the market always does things you can not predict.
The most important component of this strategy is that the underlying stock is one you want to own, ie, stable growing dividends. If I am happy with Pepsico lets say, at a 4% dividend yield and I can earn the call premium its all good. If the stock rockets up i still get the gain to the strike price, the option gets exercised, and I buy the stock again in order to execute another covered call. All good for a conservative investor. Now, if the stock tanks, the next call you sell will need to be at a higher strike so as to not get called in under your cost basis. Not a problem if you were ok with the 4% dividend yield to begin with plus the smaller premium for the call now. Like he said it all depends on the investors expectations and desires. This strategy has done me well for over 10 years. I use it for 25% of my portfolio, more as I approach retirement age!
So, I am definitely a covered call seller. (580k portfolio). When I sell a CCALL I tried to place the strike to a overvalued territory and in more than 3 months (sometimes a year). The overall goal is to generate few % extra per year. I also enable margin to sell put when my call becomes too much in the money, I'll use the premium to raise the strike of the call. So I may have a chance to save the call. And the risk of the put is there but you can often roll so out that the stock will go up one day (no free lunch but I like the odds). And finally if the call actually gets assigned, it is probably overvalued so getting out isn't such a bad thing. When you just own the stock, how long can you resist the urge to sell when over valued or it may crash the following quarter (making the assigned call actually better off). Love your channel, keep it up!
Great vid. Always good to see honest pros and cons of strategies. Informative, clear, accessible.
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I was very tempted by selling put options and then once you are assigned, selling covered calls (and I did a couple). It just sounds so obvious and easy. But once you start doing it, you realize the explanation is hidden in the premiums. I.e. as you've mentioned, you only get any kind of interesting premiums if the stock is volatile / you use strikes no too far away. Also, we say what kind of performance stock / index has p.a. or what's the average over couple of years. But in reality, you see that performance easily in just couple of days and trimming it by selling covered calls is no path to success. So yeah, I agree with the video. BTW when you think about it: Selling PUTs = selling insurance against underlying going down Selling CALLs = selling insurance against underlying going up
Great Video - As a Canadian who has looked into doing covered calls there are several unique issues Cdns need to be aware of (a) the Cdn option market sucks in terms of premiums and liquidity vs the US, (2) Cdn premiums often barely cover the cost of commission and option commission, (c) the Cdn tax treatment on premiums and exercise is different from the US which in turn impacts the liquidity profile of Cdn options throughout the year. To make it profitable you need premium over $1.00 and be able to do it repetitively throughout the year. The return at least in Canada is not there for the work involved.
Richard, excellent video. One aspect that you did not address is the decline in value of the underlying stock. Yes, the INITIAL call option will expire and you will earn the premium. HOWEVER the next call option you write will be very difficult because the underlying stock is now trading BELOW your ORIGINAL acquisition price, therefore you must write a strike price at a level higher than your original acquisition cost, the associated option premium will be very small. Basically you want to employ this strategy on a stock that has high volatility within a narrow price band. The strategy works, however watch out for the value trap stock! Excellent videos and channel content. How about one on return stacking! 😉
One of my favourite videos on your channel is your how to research a stock. Can we have a Part 2? Some companies are overvalued in market price (P/E ratio). In that case, how can we calculate what the reasonable price would be for stocks? Many stocks are too expensive now due to the AI rally. And this question has always been floating in my head. What price would be a reasonable price for X company? Would love to hear you make a video for how to make this analysis.
I use the cover call strategy on stocks I want to exit at the desired price. It help me build more income while I wait for the stock to reach my exit price. I'm trying to do this with ARM Holdings right now.
Great explanation Richard. Ideal is to be able to sell the CC as the IV is spiking on those big days, or roll as far out as you need to to capture that skew if it starts eating up your position. Ideal is not always possible though. The old saying is that it's like picking up pennies in from in front of a steam roller.
Pros: * 3 sources of revenue (diff in strike and covered cost, dividends, premium) Cons: * Missing out on tail end spikes of returns * Hit with cap gains taxes My question is it very likely for a person to miss out on tail end of spikes like this? Like the example given of Microsoft going from 400 -> 600$, that seems very improbable.
Selling puts may be a better option for many people. Essentially the same thing, writing puts and getting the premium income, but in this instance you would be required to purchase the stock if the the price falls below the strike price. I've been using it to generate income and wait for stocks I like to fall to a price I want to buy at.
In general, it seems like the best use of selling options, be it cash-secured puts or covered calls, is to provide additional income to a traditional buy-and-hold strategy rather than to be the primary source of income. Find a stock you really like and want to hold, get the cash necessary to buy it at a price you like, then sell cash-secured puts with the strike price set at that entry price. Hopefully the price of the stock goes to that planned entry price, thus you buy the shares at that price you wanted while getting to collect premiums for doing something you were going to do anyway. Then once you own the shares, start selling covered calls for those shares set at your planned exit price. The calls and puts you're selling aren't the core of your investment strategy, they're a bonus on top of the buy-and-hold strategy that you're employing.
I do it sometimes when implied vol seems high or as a natural rebalancer. If the underlying stock is getting very high, the covered call on top of it will be have a higher delta so it was naturally reduce my exposure to that underlying. Easier than selling odd lots to trim. I just make sure that the covered calls I sell don’t accidentally reduce my overall portfolio exposure to below the level I want. I like to be about 80% exposed to the S&P. If I spent 100% of my money on SPY and covered calls were at the money, I’d effectively only be only 50% invested - not where I want to be as a younger person with a long time horizon
Having not watched the video yet, would it be weird to view cc etfs (JEPI,JEPQ,GPIX,GPIQ) as a hedge in your portfolio? They drop less than the regular market in red days and their yield goes up when volatility rises so your payouts will be bigger. Obviously you don’t expect much growth from these holding but they seem stable
True. Better off trimming off the edges daily or weekly and buying back over the course of the cover call. Cover call might be good for someone who just wants to take DCAs with limited time on their hands.
I'm an admittedly lazy investor so I bought and held QYLD & QQQ and XYLD & VOO over a year to see the relative performance. Over this short time frame, it's clear that buying and holding the index funds is a better strategy.
Great video! You have inspired me to close my $BTC perpetuals and sell some naked $NVDA OOTM puts! So far I'm only indebted a cash equivalent of 38 healthy human kidneys!
One thing I've done: selling covered calls in retirement accounts while also selling puts on the same stocks/ ETFs in taxable accounts. By definition, if I'm forced to sell my stocks/ ETFs (and, normally, buy in at a higher price) I've simutaneously seen my short put position make money, i.e., the put has expired worthless and I've kept the premium. 8 or 9 times out of 10, both the short put AND the short call expire worthless, but 10 times out of 10, at least one of them do.
When to sell a covered call: if you have 100 shares of something that you would like to sell, but don't care when, sell a call on it with a strike price near the market price. Downsides: if the stock drops more than your premium before expiration, it would have made more sense to just sell at the beginning. You could simply write another call, hoping that the premiums keep up with the depreciating value. Also, as mentioned in the video, if the stock shoots up, you miss out on the appreciation, but that is a bit of a wash since you were planning to sell anyway.
So are covered call ETF’s okay as a diversification of an investment portfolio? Basically not as a primary form of long term investment but supplemental as part of an overall portfolio? The answer from the video seems to lean towards no if you’re a relatively inactive investor but I wasn’t certain if that was the intended message
Great idea....I've done a few tradse by writing covered puts and made a little money. I just don't know how to explain it and would love to have Richard explain in layman's terms
It’s the same risks… in exchange for the premium, if the stock actually goes down to the stoke price (AND THEN SOME), you’d be forced to buy it at that strike price despite the fact that it’s kept falling even below that. If you’re lucky it won’t have fallen too much below that.
Thanks for the informative content! Could you make another video explaining the pros and cons of a money market fund? Does it pose additional potential risks compared to government bonds?
Very difficult to compare. It all depends on the option trading strategy. How many DTE?, what Delta?, & what % of the portfolio is being turned over. These factors vastly change the outcome at month-end. Trade SPY (or /ES) and try your own covered calls. Or just buy VOO and drawdown an annual dividend of 4%.
I started using a covered call ETF as my downside protection in place of a bond fund in a Boglehead-style 3-fund portfolio at the start of last year. Haven't run the numbers yet, but I suspect a lot of my gains actually get eaten up by the increased expense ratio
I have RSUs from my previous employer. I plan to sell a chunk of those every quarter. Is selling covered calls a better strategy than putting in a limit order?
thank you so much for this Richard! I think you saw my posted comment requesting for this. Can't thank you enough! I searched online for so many videos and had so much issue figuring out this concept. I managed to crack it last night by piecing multiple presentations on UA-cam because none of them do a great job in explaining it to a novice like me UNTIL NOW! Turns out had I waited a day longer, it would have saved me that hassle :D
Many covered call ETF's use a mechanistic formula to selling covered calls. For eample QYLD sells covered calls at the money on a monthly basis. I personally feel that this strategy , while initially generating great returns will ultimately result in a decrease in the dollar amount of returns over time and will also result in a gradually lowering of the ETF price. I would be very interested in your analysis of these covered call ETFs. Thanks so much Bob
You can roll into infinity, you can have best of both worlds, as well as creating a cash flowing strategy that can then be diversified into non-correlated funds.
The wheel strategy is one I see often being pushed at beginner traders, which my understanding is essentially selling calls and puts over and over to slowly build enough premium to be able to make bigger trades. It seems catered to WSB high rollers who want to risk their college loan money on hitting it big.
Not entirely true. The risk of trading options is a sliding scale, although there is always some risk. An established dividend stock with low volatility is "less risky" to wheel than Tesla. And the delta on the strike prices also have percent of being exercised built right into them. You can adjust your premium (lower to higher) and it scales with your risk.
Great explanation. I'm curious how a covered call ETF would stack up against safer investments like HISA or bond ETFs. Adding a higher expected return with more downside potential. Seems like they could be a reasonable part of a balanced portfolio, especially as you potentially want income generating assets in retirement. Now maybe you'd be better off with more traditional consumer income generating assets like dividend stocks and bonds.
I find that looking at the 50 day moving avg is a good starting point when looking forward into selling cc's. Also, don't sell 30 day or within an earnings report. I also never sell cc's on all my position. I always hold some back in reserve to sell into a rise above the strike in the event my option is called. This way I have collected prem AND been able to ride upside for an overall return. Considering the Sharpe is an unnecessary complication. The simple goal in ANY investment whether long or short term is to put more cash In your pocket, taxes notwithstanding.
@4:37 Needs an explanation. On the expiration date, if MSFT stock price is less than the call option strike price, the call option wouldn't be executed. Within this case there are two subcases: (1) MSFT is worth more than $400 (but less than the strike price) (2) MSFT is worth less than $400 (what you'd originally purchased it for to cover your call option) Subcase (1) is ideal for you: the call option expires worthless, you retain the MSFT stocks that had appreciated in value, and you keep the $4 premium. Subcase (2) is slightly worse: you own a depreciating asset but you keep the $4 premium. You have to wait until MSFT rises above $400 to make your next move.
Thanks for this video. Now I understand why some people are using this strategy (though I still don't approve -I'm extremely conservative with money and investing).
Well, arguably a covered call strategy is more conservative from a risk perspective, since you are in essence selling the potential for large positive gains to do better in every other scenario. Of course, it is not appealing to someone who is conservative more so in the sense of preferring traditional financial inventions over more recent ones that are more complex and harder to get a feel for and trust.
How do you feel about selling a covered call and buying a put to trade off risk and reward? Especially for IRAs, I feel this is a better strategy than holding bonds to fund distributions in case the market goes down. I would’ve sold the stock anyway if the market went up and taken the distributions, so limiting the potential upside is not a concern.
For me, I treat options as more of an insurance than a speculative position. A covered call is sort of an insurance premium for me incase a stock I own falls. Its a risk management tool for me. I'm more worried about the potential losses than the opportunity cost of missing gains. And as such, I would only do covered calls on positions I'm fine with holding long term (even if it results in a loss), and don't mind missing out on big gains.
With selling covered calls- timing MATTERS. Use the Vix as an indication. Super low vix, good time to sell since there is a higher possibility that stocks might go down at some point. When they do, sell the option. Also, sell the call at a strike price you are ok with. Also, you could just roll the call every time and just get a tax write off if you are upside down.
I use a synthetic covered call strategy in one of my paper portfolios. Id be curious on a breakdown of the adjusted risk return on that strategy as it can reduce some of the risk of a covered call. It does require active engagement but has a pretty consistent risk profile.
Good video. I think there are two types of people who might consider covered calls... #1) I bought some shares in Nvidia last week/month/whatever ... I want to gamble and try to make more money on that position. #2) I bought some Tesla in 2017, have made a ton ... I'm ok with getting out of some shares sometime soon, but instead of selling shares at market price and paying a comission -- why not write a call close to the money and have someone call it away from you and pay you for that? Sure, you might miss some upside, but if you're up 1,000-2,000% on something, it's negligible. Been doing #2 for nearly 24 months now, pocketed some good extra money ... haven't 'lost' any shares yet, and even if I did it's at prices I'm ok with closing out some of my position. "Microsoft growing ... 50%" in 30 days - is not really a plausible example IMO. So the TL;DR advice I always have for people who have more than 100 shares of a stock - "Never 'sell' a stock to get out of a position, write a call, let someone pay you to take your shares off of your hands."
Richard I've never understood why can't you sell a covered call (Let's use the Microsoft at $420 in your example) but also have a buy order at $420. Wouldn't you get to keep your $4 premium as the seller exercises his options (which is fine you have the underlying stock to sell) and any upside would be covered by the limit order being executed?
If you're using a covered call strategy, what you're really doing is synthetically selling a put on your stock if that helps the way you think about the way your calls will perform as the market moves up and down.
@@pdcdesign9632not sure what you mean by a short sale strategy, but a covered call position is a bullish stock position, you make money if the stock goes up, or doesn't go down too much during the length of the contract. It's not a net short position.
To add: Dividends are priced into options. It brings the cost of calls down and the costs of puts up so it's actually irrelevant if the stock you are trading has a dividend.
Question about using CC ETFs for income vs just holding the underlying position and selling some for income. Underlying fund does perform better than the CC Fund. But once you include volatility into it, how might that change things? I mean, if you have to sell during a down market that could have an outsized negative effect on your portfolio, leaving you worse off even if the underlying fund actually performs better over time, right? Basically having to sell low creating sequence risk. Yes, you can mitigate that with something like fixed income, but now you have to factor in the lower returns of holding that fixed income and so the advantage of the better-performing underlying fund is reduced, right?
The part where he talks about yes, the Sharpe ratio looks good because it's assuming a normal distribution but the distribution of returns for a covered call strategy is skewed, not normal, that's when I realized I'm too ignorant to go fiddling with options.
If you are going to use a covered call strategy, you then should also use the covered put. So when the covered call is executed, you then take the money and sell a covered put. At a lower price, the man hopefully, the stock falls back down and you buy back in below the price you sold. If it’s a stock that generally stays range bound, that could be a good strategy. Citi group for example has been oscillating between $80 and $30 per share since the Great Recession…
NOTE: Some viewers have highlighted that in comparing the yield of VOO and XYLD, I used the last-twelve-month yield for XYLD and the 30-day yield of VOO. To clarify, the two are both annual yields (the 30-day figure is annualized, as highlighted by Vanguard on the ETF landing page). Nonetheless, I apologize for the confusion, as it would have been more accurate to compare the LTM yield for both. For reference, the LTM yield for VOO was 1.38% at the time of video posting, compared to the shown annualized 30-day yield of 1.39%.
Understood, but can you explain why the yield for VOO is 1.39% when the screenshot you show at 11:58 shows that it returned 22.83% over the previous year?
@@wilsonli5642 Sure thing - the 22.83% is TOTAL return. YIELD is just the income paid by the investment, whereas TOTAL return includes both the position's yield and price appreciation.
Think of yield as being like the stock dividend, and price appreciation being how much the stock has increased in price.
A lot of people tend to underestimate the downsides of a covered call because its not so visible as the premium you get, great video
It depends how much you paid for the underlying security. For instance, If you bought the stock at $10 and you ride the trend towards $20 while collecting premium 10 times then letting go of the stock once it doubled is not a bad strategy 😉 😮
The "bottom line", being all that really matters...Especially for those not living in moms basement, and actually having to WORK for their $!!! These are a great investment tool for those that want to keep more of the $ they make, while not having to stare at a screen all day...They also pay monthly, which is also an attractive option...To think: If only banks payed fair rates, not many people would bother with markets...
10:02 "university stats class" I appreciate your overestimation of the intelligence and qualification of the average retail investor
YOLO
But muh TA squiggle bros!
@@tactileslutlook at this unicorn pattern I identified bro 🦄
This is one of the best explanations of covered call etfs. I like the idea of covered call strategy on only a portion of a leveraged fund.
> I like the idea of covered call strategy on only a portion of a leveraged fund.
Why
If you're only selling a few options against your leveraged ETF, then you're not really covered
Be aware, if you leverage a covered call, you risk that it first drops, margin calls you and then rises, resulting in an uncapped loss.
@@alhollywood6486You don't know what covered means lol. It means you hold 100 shares per option contract sold.
Richard explains everything so well and doesn't over complicate a topic that doesn't need to be!
Your Content Stands Out In A Refreshing Way! I Truly Appreciate The Absence Of Background Music In Your Videos, As It Allows Your Message And Personality To Shine Through Without Distractions. Keep Up The Great Work!
I totally agree with you. I trade covered calls for a year and decided to stop. It underperform buy and hold for a long shot... there is truly no free lunch out there
Covered calls can be used safely if one intends to get out of the position anyway but have some time before they intend to sell. Selling CCs in the money would effectively be selling it now but getting paid the intrinsic value later in exchange for a premium. Sure, the stock might rise while the contract is in effect, but that's no different than selling now and watching the stock go up without you holding it. You could even sell barely in-the-money CCs to try and squeeze some more premium out potentially multiple times before you finally let the stock go. The point is to put yourself in a position where you're satisfied with either outcome. For me, it's almost a counter-FOMO strategy to get over the mental hangup of selling something you've been holding onto for a long time.
What if the stock falls 20%?
@@IndexInvestingWithCole that's the same risk you have for holding any stock for any time period. But as a consolation prize, your CC is likely out of the money, you get the premium, and you can sell again. And you have lowered your break even price, giving you more leeway for the next CC. All this assumes that you can the time to play around again before you need that money from the stock's intrinsic value. If you don't, then sell a really deep in the money CC so you have more security. Folks will buy those super deep CCs for LEAP options, but those need a few months time at least.
But if you don't have the time or risk tolerance, then just sell it on the market now.
@@IndexInvestingWithCole
Look into ‘rolling out’ the position. You would close out the call and either sell and reap the loss on the equity or short another call. There is a falling knife danger though. And it could take a long time of bag holding and shorting to turn it around. (High tech speculation companies are the worst about this)
When beginning, pick a stock that has stable 30-90 day trends and trades enough options that you’ll get decent executions, And keep reasonable expectations. It is a battle of attrition, shorting out of the money calls and waiting. It will feel like a slow process if you watch everyday.
If you want to sell you either expect the price to go down (so you want to sell now, not later) or you want the money now (and can't wait).
I think I don't understand the scenario you're discussing.
@@ricardoamendoeira3800 there are situations where you can wait a bit like getting ready to take a distribution from a retirement account or making a payment in a few months. That's where selling in the money CCs can work. Again, it's only if you have the luxury of time. They are a minority of situations but they are there.
I did a collar strategy of selling weekly calls with strikes at/near market prices (income) while also buying puts below market (insurance). The idea was to have the stock(s) called away from me each Friday, collect the premium less the premium I paid for the puts. The goal was to find annualized returns above 12%. After four months, I made about the same amount of money as buying and holding the index, so I switched over to that. It [wasn't] worth the time constantly looking for the good deals.
That sounds like a lot of work. I would rather pay an ETF manager and focus on extra revenue income elsewhere. 😅
That's a really stupid strategy. You don't earn any income because you're paying for the puts and don't get any return because you sold calls. This is a long stock plus a synthetic short position so you have no position in the underlying stock while also pay commissions and don't earn interest on your capital
Good video in general. Not a fan of covered-call ETFs, but big fan of writing calls on the positions I own. Writing calls is for advanced traders/investors. One needs to learn which underlying to pick, how to manage the positions, understand the greeks (there is jargon involved), adjusting your deltas, doing ratios, rolling out etc to be successful. Basically, it requires knowledge, time and energy that most people don't have. But if you do, then the strategy can be a lot more profitable on the long term than simply holding positions.
Here is one example from my portfolio: Bought 400 share of SU in Nov 2022 for an avg price of 46,96 CAD. The stock closed this Friday at 44,58. So far, I have made a profit of 18,09%: 1050.00 in dividends and 3x as much (3125,75 to be exact) in collected premium.
But again, it takes time and knowledge and therefore it is not recommended for everyone.
I was looking for a comment like this. I agree and use covered calls to make a lot of cashflow from my portfolio. There was no mention of rolling options to prevent them getting assigned, but I guess that’s a bit too advanced for this video.
Since the video popped up again in my playlist, here is an update on that trade that is still on 7 months later. Currently up 34,6% (since the beginning). Without the CC, the total return thus far would be 16,8%. I keep rolling the calls; sometimes for a debit (if deep ITM), but the vast majority of the time, I roll for a credit. My current strike price is 54 (Nov exp) and the stock trades now around 50,50. Writing this on Sept 22 2024.
That is just one anecdotal position - can you (honestly) compare the total return of all your active trading efforts for your whole life to what you would've gotten by just holding VOO for the same capital outlay and duration?
@@formalshorts8561 I can’t say for a lifetime because I have only been trading options for around 2 years. I can say that what I make with options is a bonus on top of what I make in capital gains from holding stock. So yes it’s more profitable to hold a stock and sell calls, than to just hold the stock.
I really appreciate these videos. I don't do day trading, but it's helpful to understand these concepts to get an idea of who's talking crap and who has reasonable investment advice.
Excellent video for those who aren't yet experts in options trading. This explains the Covered Call much better than almost any other edu video I've seen so far. Why? Because Richard explains the shared risk/return/expectation of both parties -- not just you, selling the CC, but also that of the person buying it. Great "reality check."
I've had friends find out the hard way that covered calls as an ongoing strategy is not all that it is cracked up to be. If the market surges, your gains get capped as your stock gets yanked away. If they market crashes , you lose just a few percent less than just buy and hold. Plus, after eating the big loss, you have less money to buy stocks for covered calls. A friend of mine was crushing it with covered calls from 2005-2007, then when the GFC hit, he lost close to 3/4 of his capital.
I think the best use is when you have a stock that you like, but it has gotten overpriced You can write covered calls. If you get called out, you don't mind because you wanted to sell anyways. If the stock goes down, you got some income to offset the loss on a stock you don't mind owning.
I could see it make sense doing covered calls on overpriced stocks that you're sitting on big short term cap gains for. But otherwise you're better off selling.
Cc is like any strategy just about modifying your risk exposure as you said.
I've seen some advice from someone on r/options that says to only use covered calls on more stable stocks and that you can use this strategy to get out of the position.
@@BestWOTReplayss There is no such thing as a stable stock when the market tanks 30-50%. In the GFC, even blue chip like P&G, Pepsi, Colgate, and J&J went down hard
@@BestWOTReplayss if you sell covered calls on a less volatile stock then you get less for it. There is no free lunch in investing
How did your friend lose 3/4 of his capital doing covered calls during the GFC? If anything he would be making a killing on covered calls. If you are just talking about the paper losses on the underlying stocks, then it doesn’t matter. Don’t sell and he would have been fine after 10 years later.
This is one of my favorite semi-passive methods for income generation. As others have said however, it can flip on you quickly. I recently sold several CCs on my PLTR shares for earnings where I believed the statistical odds of a 30% gain in one week was close to nil..... ended up having to buy to close and eat the difference because it rose around 50%!
Great comment! Have you considered writing a trailing stop on the CC? This would limit your downside. Been there and unfortunately done the same thing.😉
@@juwright1949 I'll have to look into that. Thanks for the heads up. In the end, I was very happy with the outsized gains of my Pltr shares 👌
Rather it flip up 50% than down.
Wait, why did you have to buy to close? Doesn't that mean they were naked calls, not covered calls?
I'm bullish for long term and didn't want to lose my shares with my low cost basis. If the contract was to go in the money, they technically could have been exercised prior to expiration.
Well this is good timing. A month ago I sold a CC on VTI exp 2/16/24 $250 strike. Been on a roller coaster all week worrying it’d execute. I did not actually want to sell the position! It did expire worthless, but it’s a lesson learned.
Even if the option gets exercise if you really want back in VTI, immediately look at doing the cash secured put you now have the funds to buy and then you can collect another premium And you have the possibility to get in at a lower price and the premium to even offset any potential loss if it goes lower.
Just roll the option?
You do NOT want to sell an option that you don't want to be exercised, because it EASILY could, especially if it's near the money. Much better to sell an OTM option on PART of a position such that if it gets exercised, you're happy about the overall position.
I like to sell a covered call AND a put on the same stock. One or both of them will expire worthless (especioially when the put strike is lower than the call strike), I can roll the leg that is ITM if the stock doesn't move too far, and worst case, my long position rises meaningfully, OR I get the opportunity to sell another OTM put on a meaningully cheaper stock I want to own more of.
The key thing is TO HAVE A PLAN and to KNOW WHAT YOU'RE DOING. Some books on Amazon are good, and there's lots of decent reviews on option books there.
Very clearly explained! I always start with the premise that there is no free lunch - unless someone else is paying.
Love the video! I agree that on a numbers game CC ETFs will underperform in the long run. However, I like to view investing through a second lens of personal happiness. With a strategy that focuses on income, you gain more real life options by increasing your cash flow. An example of this might be allowing yourself to take a nice vacation, or perhaps buy something that can be used to increase your happiness on a month you don't wish to DRIP. Instead of going the total return approach and having to wait until you are too old to enjoy your accumulated wealth, you can enjoy life while in good health and with more energy.
This is my philosophy and reasoning for holding CC ETFs. Although, I prefer an ETF that only writes calls on a portion of the fund. That way I to still get some exposure to the upside.
Keep up the great work!
Bang on!! That's exactly my sentiment. Who wants money when they are toooo old to actually enjoy it? What I'm doing is finding cc etfs that have a lower coverage ratio... Ie 33 % to 50% coverage... That way half or more of the portfolio has the potential to grow or perserve the capital all while earing over 10 % monthly paying yield. What's not to like?? Best of both worlds in my opinion. I could care less of the traditional measure of paper gain that can't actually used or lived on until an old age retirement plan.
Yes, I call it the human side of investing. You sacrifice some of the money (gains) to have a lifestyle that makes you happy and fulfills you. Math is important in investing, but life isn't about math.
I hold QYLD, RYLD, SDEM already 4 years and happy with my covered calls investments
One can be happy and still hold a sub-optimal portfolio.
Jepq and spyi both are covered calls with good dividend yeids and has stock growth unlike the ryld and qyld.
I've been selling covered calls on BAC stock since 1998, they've never been called away, and I've made enough money that my original cost-basis is negative.
Couple of points missed
1) options can be rolled in future
2) selling puts might be a decent idea for better DCA
Agreed. Selling Puts right now especially when volatility is higher and people are scared means that overall puts are overpriced due to investors trying to hedge downside risk.
I have been following you ever since the start of the pandemic back in March 2020. You never cease to amaze me. Thank you Richard. Sending positive vibes from New Brunswick, right next to the Gaspe!
I've seen the best and worst of this strategy. I wheel calls and puts in my Roth IRA so no worries about tax implications there...but I have definitely been caught on the wrong side of huge moves up and down and have had my share of capped gains and unrealized losses. But it really is amazing to be able to sell calls and puts to the YOLO crowd and know that statistically speaking, you're more likely to come out on top as a seller rather than a buyer. And I have certainly put the premiums to good use. There are large positions in my portfolio that were purchased exclusively with covered call and put premiums. Anyways I acknowledge the risks but overall I've had great success with this strategy.
Could you recommend a book?
Thank you Richard! Please do more of these educational videos, it especially benefit the younger crowd that now have access to Robinhood accounts. Ignorance is dangerous but incomplete knowledge is even more dangerous, as it leads to people to confidently make bad assumptions and take risks that can cost them everything.
i just keep 75% invested and do cash secured puts at support with the rest of 25%. Cut my loss at 100% of my premium, generally there is a bounce back from support which easily gives 70% PE depreciation. Working like a charm. Don't wait, i waited for 3 years, i wish i had started this early. Don't shy away from cutting your loss in cash secured puts. It works 3 out of 4 times.
Yes, same here. Great strategy, I only write on stocks that I want to own at the strike I want to own them at. Kinda like getting paid to purchase a stock I want to own at a price I want to buy it at. I use CC to exit a position, like getting paid to sell stock I want to sell @ the price I want to sell it at. GREAT COMMENT. 👍🏻
Break it down for a noob, please. Also, what platform do you use/ recommend
Thanks for covering this. I asked the options reddit if they would play a game where on a dice 1-5 gains a dollar and 6 loses 6 dollars the poll was over 70% yes.
I have heard this explained several times and your explanation is the best.
Good point. You can fix some of the missed upside by rolling your covered call out and up. But it is not a set and forget strategy. I would say if you start with options you need to understand it is a daily and often multiple times per day job. If you cant do that just stick to buy and hold. Options can go wrong really fast if you are not paying attention and know how to fix a position.
Exactly. Well said
Thank you...great explanation...especially liked the part why selling covered call options are less risky than selling regular call options
I’ve just recently started using covered calls in my portfolio but I only use them on positions I’m looking to sell as is. I don’t expect these positions are going to drop radically hence why I’m not just selling them outright. I feel covered calls make sense here as I can generate a little extra income but I won’t be mad if I lose my positions
This right here. Use it to get out of positions that you don't think will crash but might flatline. Don't do it on stocks with huge upside or downside
From a value investing perspective, I think it makes more sense to just sell that position and use the capital on a stock you believe to have better future prospects. What makes you satisfied to stay with a company that you don't believe will appreciate in value?
I generally only sell a covered call or cash secured puts when I'm largely indifferent to the outcome. The more you need to be able to predict the future to accomplish your goals, the less I consider derivatives a good idea.
I spent like 4 years thinking I was a genius stock picker while my 401k was just in an S&P sitting and growing. After 4 years I saw I was not a genius and have a schedule to buy an S&P every 2 weeks no matter what is happening. This has been so….much….better….
Great video! Didn't know about the distributions being different but that made it click for me why risk is so hard to measure.
Regarding being the house: always thought that point was a bit odd. In gambling the house gets to set its own fees and payout schedule. Whereas with options you're subject to whatever the market sets the premiums at, having to take more risk to get higher premiums.
After cuts from contract fees, PFOF, etc (or bundled as a fund expense) it seems like it'd be more accurate to say it's like a game of poker between two players who each paid a fee to their brokers, market makers, and/or fund managers.
You're still the house. You can choose whether you sell the CC or not. If the rate and schedule is unattractive, you wait. The only real difference here is the casino is only open when the house wants it to be.
@@ZaerkiYou can't consistently sell CC's with a positive expected outcome (statistically speaking), the market won't buy them. So no, you're not the house, unless you being the house is you being a casino that is always waiting for someone to enter but no one ever does.
It sounds more like a player finding an edge over the house rather than being the house.
I mean if someone has a strong reason or some form of insight into mispricing, then more power to them. But unlike the "house" comparison there isn't a statistical guarantee to win in the long term vs buying and holding.
Just looks like both sides paying a small fee to hedge their risk in opposite directions.
Your measured and balance review of material is fantastic.
Great insight, I have been doing calls for a year or so, the pain of missing out on huge upside is never really discussed by those championing call writing. In Nov 22 I bought meta for 130, sold 2 calls at 170 one year out and got crushed as it went up to 400. Yes, I made 8k but missed out on much much more if I just bought and held. You also quite rights point out that all premiums are short term, so get the worse tax treatment, also there is always a fee. I enjoy doing calls and will continue, but ultimately it is bearish in nature. It feels weird when your call goes to zero, you feel like you have won the game, but over that time your equity has possibly taken a hit.......you can't celebrate both outcomes. Regards and thanks for the content
So what exactly happened with META? Were your share called away? Were you not able to roll your covered calls up in strike and out into the future?
@@tonytate2197 yeah mate called away, I rolled out a couple of times from 150 to 170, but they were like a runaway train, I made money but left so much on the table…..ah well, win some lose some
@@tonytate2197 It would have cost him $46,000 to roll his calls up to the new strike...
You should never sell CCs that far out. About 45 days is optimal, based on the research. This allows you to take advantage of faster theta decay
I've been doing the wheel strategy with selling cast secured puts, rolling and covered calls for a few years now. It's been nothing short of life changing. You have to be disciplined though, I started off with about 3 rules when selling contracts now I have about 15 that I follow before I sell one. The house does indeed always win....some times lol.
Care to share?
YES I USE MR DINGUS BINGIS TO HELP ME WITH THIS STRATEGY. EXCELLENT INVESTOR
Best video so far talking about the cons/tax ramifications. GREAT JOB!
It's the way I used to generate some additional revenue while trying to exit my excessive MSFT position to diversify our portfolio. Pulled in a few thousand while eventually having the calls exercised, which resulted in a much more diversified portfolio as I purchased a variety of mutual funds with the resulting cash.
I personally did covered calls on a select high risk investment. The option themselves worked in my favor with the money I generated from selling options (covered calls / buy write/ cash secured put). However the investment themselves have at least at the moment have dropped, resulting in a net loss. In this case I would have been better using the classic invest in basic index funds and ride them out.
While options are useful, normal people should avoid them due to the risks highlighted in the video and the time used to do the pricing correctly. And the market always does things you can not predict.
The most important component of this strategy is that the underlying stock is one you want to own, ie, stable growing dividends. If I am happy with Pepsico lets say, at a 4% dividend yield and I can earn the call premium its all good. If the stock rockets up i still get the gain to the strike price, the option gets exercised, and I buy the stock again in order to execute another covered call. All good for a conservative investor. Now, if the stock tanks, the next call you sell will need to be at a higher strike so as to not get called in under your cost basis. Not a problem if you were ok with the 4% dividend yield to begin with plus the smaller premium for the call now. Like he said it all depends on the investors expectations and desires. This strategy has done me well for over 10 years. I use it for 25% of my portfolio, more as I approach retirement age!
Thank you Richard for teaching me Covered Calls are never going to be in my circle of competence :)
So, I am definitely a covered call seller. (580k portfolio). When I sell a CCALL I tried to place the strike to a overvalued territory and in more than 3 months (sometimes a year). The overall goal is to generate few % extra per year. I also enable margin to sell put when my call becomes too much in the money, I'll use the premium to raise the strike of the call. So I may have a chance to save the call. And the risk of the put is there but you can often roll so out that the stock will go up one day (no free lunch but I like the odds). And finally if the call actually gets assigned, it is probably overvalued so getting out isn't such a bad thing. When you just own the stock, how long can you resist the urge to sell when over valued or it may crash the following quarter (making the assigned call actually better off).
Love your channel, keep it up!
Great vid. Always good to see honest pros and cons of strategies.
Informative, clear, accessible.
I was very tempted by selling put options and then once you are assigned, selling covered calls (and I did a couple). It just sounds so obvious and easy. But once you start doing it, you realize the explanation is hidden in the premiums. I.e. as you've mentioned, you only get any kind of interesting premiums if the stock is volatile / you use strikes no too far away. Also, we say what kind of performance stock / index has p.a. or what's the average over couple of years. But in reality, you see that performance easily in just couple of days and trimming it by selling covered calls is no path to success. So yeah, I agree with the video.
BTW when you think about it:
Selling PUTs = selling insurance against underlying going down
Selling CALLs = selling insurance against underlying going up
Great Video - As a Canadian who has looked into doing covered calls there are several unique issues Cdns need to be aware of (a) the Cdn option market sucks in terms of premiums and liquidity vs the US, (2) Cdn premiums often barely cover the cost of commission and option commission, (c) the Cdn tax treatment on premiums and exercise is different from the US which in turn impacts the liquidity profile of Cdn options throughout the year. To make it profitable you need premium over $1.00 and be able to do it repetitively throughout the year. The return at least in Canada is not there for the work involved.
scroll back up and cover call that like button 👆
… and cover call that subscribe button for info like this?
Richard, excellent video. One aspect that you did not address is the decline in value of the underlying stock. Yes, the INITIAL call option will expire and you will earn the premium. HOWEVER the next call option you write will be very difficult because the underlying stock is now trading BELOW your ORIGINAL acquisition price, therefore you must write a strike price at a level higher than your original acquisition cost, the associated option premium will be very small. Basically you want to employ this strategy on a stock that has high volatility within a narrow price band. The strategy works, however watch out for the value trap stock! Excellent videos and channel content. How about one on return stacking! 😉
theyre basically perfect for small cap pharma stocks right before FDA decisions.
One of my favourite videos on your channel is your how to research a stock.
Can we have a Part 2?
Some companies are overvalued in market price (P/E ratio). In that case, how can we calculate what the reasonable price would be for stocks? Many stocks are too expensive now due to the AI rally. And this question has always been floating in my head.
What price would be a reasonable price for X company?
Would love to hear you make a video for how to make this analysis.
I use the cover call strategy on stocks I want to exit at the desired price. It help me build more income while I wait for the stock to reach my exit price. I'm trying to do this with ARM Holdings right now.
Great explanation Richard. Ideal is to be able to sell the CC as the IV is spiking on those big days, or roll as far out as you need to to capture that skew if it starts eating up your position. Ideal is not always possible though. The old saying is that it's like picking up pennies in from in front of a steam roller.
Pros:
* 3 sources of revenue (diff in strike and covered cost, dividends, premium)
Cons:
* Missing out on tail end spikes of returns
* Hit with cap gains taxes
My question is it very likely for a person to miss out on tail end of spikes like this? Like the example given of Microsoft going from 400 -> 600$, that seems very improbable.
Selling puts may be a better option for many people. Essentially the same thing, writing puts and getting the premium income, but in this instance you would be required to purchase the stock if the the price falls below the strike price. I've been using it to generate income and wait for stocks I like to fall to a price I want to buy at.
In general, it seems like the best use of selling options, be it cash-secured puts or covered calls, is to provide additional income to a traditional buy-and-hold strategy rather than to be the primary source of income. Find a stock you really like and want to hold, get the cash necessary to buy it at a price you like, then sell cash-secured puts with the strike price set at that entry price. Hopefully the price of the stock goes to that planned entry price, thus you buy the shares at that price you wanted while getting to collect premiums for doing something you were going to do anyway. Then once you own the shares, start selling covered calls for those shares set at your planned exit price. The calls and puts you're selling aren't the core of your investment strategy, they're a bonus on top of the buy-and-hold strategy that you're employing.
I do it sometimes when implied vol seems high or as a natural rebalancer. If the underlying stock is getting very high, the covered call on top of it will be have a higher delta so it was naturally reduce my exposure to that underlying. Easier than selling odd lots to trim.
I just make sure that the covered calls I sell don’t accidentally reduce my overall portfolio exposure to below the level I want. I like to be about 80% exposed to the S&P.
If I spent 100% of my money on SPY and covered calls were at the money, I’d effectively only be only 50% invested - not where I want to be as a younger person with a long time horizon
Having not watched the video yet, would it be weird to view cc etfs (JEPI,JEPQ,GPIX,GPIQ) as a hedge in your portfolio? They drop less than the regular market in red days and their yield goes up when volatility rises so your payouts will be bigger. Obviously you don’t expect much growth from these holding but they seem stable
True. Better off trimming off the edges daily or weekly and buying back over the course of the cover call. Cover call might be good for someone who just wants to take DCAs with limited time on their hands.
I'm an admittedly lazy investor so I bought and held QYLD & QQQ and XYLD & VOO over a year to see the relative performance. Over this short time frame, it's clear that buying and holding the index funds is a better strategy.
Jepq and spyi have stock growth and good dividend covercall stocks unlike global x ones.. qyld and xyld.
Great video! You have inspired me to close my $BTC perpetuals and sell some naked $NVDA OOTM puts! So far I'm only indebted a cash equivalent of 38 healthy human kidneys!
One thing I've done: selling covered calls in retirement accounts while also selling puts on the same stocks/ ETFs in taxable accounts. By definition, if I'm forced to sell my stocks/ ETFs (and, normally, buy in at a higher price) I've simutaneously seen my short put position make money, i.e., the put has expired worthless and I've kept the premium.
8 or 9 times out of 10, both the short put AND the short call expire worthless, but 10 times out of 10, at least one of them do.
When to sell a covered call: if you have 100 shares of something that you would like to sell, but don't care when, sell a call on it with a strike price near the market price. Downsides: if the stock drops more than your premium before expiration, it would have made more sense to just sell at the beginning. You could simply write another call, hoping that the premiums keep up with the depreciating value. Also, as mentioned in the video, if the stock shoots up, you miss out on the appreciation, but that is a bit of a wash since you were planning to sell anyway.
So are covered call ETF’s okay as a diversification of an investment portfolio? Basically not as a primary form of long term investment but supplemental as part of an overall portfolio?
The answer from the video seems to lean towards no if you’re a relatively inactive investor but I wasn’t certain if that was the intended message
I always remember from a book about options I read saying that, covered call selling is for shares you don't mind parting.
Thank you mr. Bagel for this grate episode.
Would you make a parallel one on purchasing stock positions through selling puts?
Great idea....I've done a few tradse by writing covered puts and made a little money. I just don't know how to explain it and would love to have Richard explain in layman's terms
It’s the same risks… in exchange for the premium, if the stock actually goes down to the stoke price (AND THEN SOME), you’d be forced to buy it at that strike price despite the fact that it’s kept falling even below that. If you’re lucky it won’t have fallen too much below that.
Gained an extra wrinkle in my brain after watching this. Thanks Richard!
Thanks for the informative content! Could you make another video explaining the pros and cons of a money market fund? Does it pose additional potential risks compared to government bonds?
Very difficult to compare. It all depends on the option trading strategy. How many DTE?, what Delta?, & what % of the portfolio is being turned over. These factors vastly change the outcome at month-end. Trade SPY (or /ES) and try your own covered calls. Or just buy VOO and drawdown an annual dividend of 4%.
I started using a covered call ETF as my downside protection in place of a bond fund in a Boglehead-style 3-fund portfolio at the start of last year. Haven't run the numbers yet, but I suspect a lot of my gains actually get eaten up by the increased expense ratio
Would love to see a video on your thoughts about the wheel strategy which uses both calls and puts
I love when you get technical
I have RSUs from my previous employer. I plan to sell a chunk of those every quarter. Is selling covered calls a better strategy than putting in a limit order?
thank you so much for this Richard! I think you saw my posted comment requesting for this.
Can't thank you enough! I searched online for so many videos and had so much issue figuring out this concept. I managed to crack it last night by piecing multiple presentations on UA-cam because none of them do a great job in explaining it to a novice like me UNTIL NOW! Turns out had I waited a day longer, it would have saved me that hassle :D
Brilliantly explained and to the point. Thank you!
Many covered call ETF's use a mechanistic formula to selling covered calls. For eample QYLD sells covered calls at the money on a monthly basis. I personally feel that this strategy , while initially generating great returns will ultimately result in a decrease in the dollar amount of returns over time and will also result in a gradually lowering of the ETF price. I would be very interested in your analysis of these covered call ETFs. Thanks so much
Bob
The NAV erodes overtime but you can purchase something like VOO to balance it out
Thank you for your reply Joe. i can only hope that Richard chooses to respond too with useful information.@@joekerr3638
You can roll into infinity, you can have best of both worlds, as well as creating a cash flowing strategy that can then be diversified into non-correlated funds.
Exactly! I think he failed to acknowledge the ability to role the position to infinity like you said ❤😅
Yep. Just staying with the buy & hold strategy.
The wheel strategy is one I see often being pushed at beginner traders, which my understanding is essentially selling calls and puts over and over to slowly build enough premium to be able to make bigger trades.
It seems catered to WSB high rollers who want to risk their college loan money on hitting it big.
Not entirely true. The risk of trading options is a sliding scale, although there is always some risk. An established dividend stock with low volatility is "less risky" to wheel than Tesla. And the delta on the strike prices also have percent of being exercised built right into them. You can adjust your premium (lower to higher) and it scales with your risk.
Great explanation. I'm curious how a covered call ETF would stack up against safer investments like HISA or bond ETFs. Adding a higher expected return with more downside potential. Seems like they could be a reasonable part of a balanced portfolio, especially as you potentially want income generating assets in retirement. Now maybe you'd be better off with more traditional consumer income generating assets like dividend stocks and bonds.
I find that looking at the 50 day moving avg is a good starting point when looking forward into selling cc's. Also, don't sell 30 day or within an earnings report. I also never sell cc's on all my position. I always hold some back in reserve to sell into a rise above the strike in the event my option is called. This way I have collected prem AND been able to ride upside for an overall return. Considering the Sharpe is an unnecessary complication. The simple goal in ANY investment whether long or short term is to put more cash In your pocket, taxes notwithstanding.
@4:37 Needs an explanation.
On the expiration date, if MSFT stock price is less than the call option strike price, the call option wouldn't be executed. Within this case there are two subcases:
(1) MSFT is worth more than $400 (but less than the strike price)
(2) MSFT is worth less than $400 (what you'd originally purchased it for to cover your call option)
Subcase (1) is ideal for you: the call option expires worthless, you retain the MSFT stocks that had appreciated in value, and you keep the $4 premium.
Subcase (2) is slightly worse: you own a depreciating asset but you keep the $4 premium. You have to wait until MSFT rises above $400 to make your next move.
Been waiting for the covered call video for a while now. Thank you!!
Thanks for this video. Now I understand why some people are using this strategy (though I still don't approve -I'm extremely conservative with money and investing).
Well, arguably a covered call strategy is more conservative from a risk perspective, since you are in essence selling the potential for large positive gains to do better in every other scenario. Of course, it is not appealing to someone who is conservative more so in the sense of preferring traditional financial inventions over more recent ones that are more complex and harder to get a feel for and trust.
How do you feel about selling a covered call and buying a put to trade off risk and reward? Especially for IRAs, I feel this is a better strategy than holding bonds to fund distributions in case the market goes down. I would’ve sold the stock anyway if the market went up and taken the distributions, so limiting the potential upside is not a concern.
For me, I treat options as more of an insurance than a speculative position. A covered call is sort of an insurance premium for me incase a stock I own falls. Its a risk management tool for me. I'm more worried about the potential losses than the opportunity cost of missing gains.
And as such, I would only do covered calls on positions I'm fine with holding long term (even if it results in a loss), and don't mind missing out on big gains.
With selling covered calls- timing MATTERS. Use the Vix as an indication. Super low vix, good time to sell since there is a higher possibility that stocks might go down at some point. When they do, sell the option.
Also, sell the call at a strike price you are ok with.
Also, you could just roll the call every time and just get a tax write off if you are upside down.
I use a synthetic covered call strategy in one of my paper portfolios. Id be curious on a breakdown of the adjusted risk return on that strategy as it can reduce some of the risk of a covered call. It does require active engagement but has a pretty consistent risk profile.
Great stuff. Enjoy this more technical take a lot.
Great explanation!! May I request you to make a similar video on selling cash secured puts please 😊 🙏
Great explanation. Could you do a video on split corp etfs as well? (also popular for cash flow-seeking investors)
Good video. I think there are two types of people who might consider covered calls...
#1) I bought some shares in Nvidia last week/month/whatever ... I want to gamble and try to make more money on that position.
#2) I bought some Tesla in 2017, have made a ton ... I'm ok with getting out of some shares sometime soon, but instead of selling shares at market price and paying a comission -- why not write a call close to the money and have someone call it away from you and pay you for that? Sure, you might miss some upside, but if you're up 1,000-2,000% on something, it's negligible.
Been doing #2 for nearly 24 months now, pocketed some good extra money ... haven't 'lost' any shares yet, and even if I did it's at prices I'm ok with closing out some of my position.
"Microsoft growing ... 50%" in 30 days - is not really a plausible example IMO.
So the TL;DR advice I always have for people who have more than 100 shares of a stock - "Never 'sell' a stock to get out of a position, write a call, let someone pay you to take your shares off of your hands."
Richard I've never understood why can't you sell a covered call (Let's use the Microsoft at $420 in your example) but also have a buy order at $420. Wouldn't you get to keep your $4 premium as the seller exercises his options (which is fine you have the underlying stock to sell) and any upside would be covered by the limit order being executed?
If you're using a covered call strategy, what you're really doing is synthetically selling a put on your stock if that helps the way you think about the way your calls will perform as the market moves up and down.
it's a short sell strategy.
@@pdcdesign9632not sure what you mean by a short sale strategy, but a covered call position is a bullish stock position, you make money if the stock goes up, or doesn't go down too much during the length of the contract. It's not a net short position.
To add: Dividends are priced into options. It brings the cost of calls down and the costs of puts up so it's actually irrelevant if the stock you are trading has a dividend.
Can you do a video on cash secured puts? Loved this one.
excellent explanation, etill have a few questions though.
1et one being what about "At the money" strategy?
(like Hamilton ETF)
thx and cheers
Question about using CC ETFs for income vs just holding the underlying position and selling some for income. Underlying fund does perform better than the CC Fund. But once you include volatility into it, how might that change things? I mean, if you have to sell during a down market that could have an outsized negative effect on your portfolio, leaving you worse off even if the underlying fund actually performs better over time, right? Basically having to sell low creating sequence risk. Yes, you can mitigate that with something like fixed income, but now you have to factor in the lower returns of holding that fixed income and so the advantage of the better-performing underlying fund is reduced, right?
So would you say Roth IRA is the best place for covered call ETFs?
The part where he talks about yes, the Sharpe ratio looks good because it's assuming a normal distribution but the distribution of returns for a covered call strategy is skewed, not normal, that's when I realized I'm too ignorant to go fiddling with options.
If you are going to use a covered call strategy, you then should also use the covered put. So when the covered call is executed, you then take the money and sell a covered put. At a lower price, the man hopefully, the stock falls back down and you buy back in below the price you sold. If it’s a stock that generally stays range bound, that could be a good strategy. Citi group for example has been oscillating between $80 and $30 per share since the Great Recession…
This is super informative. Thank you.
Hey @Richard, would you please share your thoughts in selling puts in Stocks you do want to buy anyways as a strategy?
What about selling cash Secured puts once you are assigned?
Looks so much complicated but still fun and curious to learn