Very interesting. Shouldn't we also take into account capital erosion in the profit calculator according to our cost basis? Or is this effectively covered in the intrinsic value? Thanks for the great content
Thanks for the video. Can you get called early? Like right away? Is this different than what the global x ETFs (QYLD, ,XYLD, etc) do on a monthly basis? Right now I prefer to just dollar cost average out of the money covered call ETFs like SPYI, QQQI, FEPI, etc as a part of my income portfolio and pay the expense fee unless I see other people can do it better on their own. Are folks having better luck than 12% and 14% returns annually?
You are good with those ETF's. If you for example, wrote an ITM call on the S&P last October, you would be kicking yourself every day since. The market has gone ballistic upward, so you would have lost all upward movement, and only collected a small amount of time premium. If instead, you work with XYLD, they have a much bigger position and a much higher likelihood of being able to see the rip coming, and an ability to adjust time frame, and a steady supply of new money hitting the fund. I like the funds a lot more than my own S&P Covered call position for these reasons.
@@BrisLS1 Thanks a lot for the thoughtful feedback. I know some people are all about doing their own options but I just assume go this route. I didn't know that about XYLD so appreciate the new info.
thanks... great info.... so if your shares get assigned at the lower ITM strike price.... that would trigger a wash sale... so potentially you couldn't buy the shares again for 30 days?? am I correct in my thinking?
Hi Joe @12:20 just trying to understand, so, in this case, we are actually purchasing 100 shares at 440$ current value but selecting a lesser 435$ strike price? our shares will be called away right anything more than 435$? at the expiration? and we continue to use the same strategy? so let's say the shares go down less than our strike price of 435 assume 420$ at expiration and we don't close then we will be still own those shares right?
Hello what do you do if the market goes below your covered call at expiration date and keeps tanking? What is your next move? It is not very clear in this video thanks 🙏
@@saimiride You basically would have to hold your shares, ride out the downturn. At this point tough, you can 'strategically' maneuver and sell Out the money calls, either at or a bit above your 'cost basis', if the premium is worth it. Depending on the size of the downturn, you may even sell calls a bit 'below' your cost base to get a decent premium...but you have to keep a keen eye because you don't want your shares to get assigned (taken away) at a lower cost than what you purchased (aka your cost base). Hope this helps...
A lot of people don't understand covered call funds. Because they're bracketed as ETFs (and their performance tends to be reported the same way) people tend to think of them as traditional investment trusts when they're actually limited liability insurance vehicles. The terminology gives it away - liability, cover, premium, etc, and the regulatory treatment is essentially the same. You have to think of them in those terms, but most investors don't understand insurance. Worth considering a bit of research and comparing your underlying asset to a ship and cargo at sea.
Joe, thanks for all your educational videos. Wash Sale Rule question. If you buy shares at 100, sell ITM at $95. Stock is assigned (taken away from me at $95. If I want to repeat the process with the same stock, and I buy shares back at $94.99 or less I get hit with Wash Sale Rule don't I?
Something similar just happened to me when I sold a CC , bought it back lower, stock bounced, sold CC again, all with same expiration date, instead of getting my premium, I actually lost money selling the CC a second time.
Hi Joe, you are buying the shares before selling the ITM calls right? Also, I think you made a mistake in your prior video on how SPYT works. I explained in a comment on that video. Thanks for the great channel.
The only problem with ITM calls of the stock rebounds quickly and tremendously you get none of the upside recovery which could be substantial. Thousands of dollars. Or if the stock goes up you get none of the appreciation other than the premium you received. Its good if the price drops but not when its going up. So you guessing you know that the market is going down (direction) and the time it is going down.
I understand the point but I have been burned time and time again to the tune of 50k thinking the market is going down with ITM calls. When we know the market goes up most of the time. Im not a perma bull or bear but just trying to time the market is terribly tough. I have tried it for 10 years. I would do CC out the money you get some upside and the premium will cover some downside but if you are looking to sell the stock anyway soon then ITM CC is definitely the way to go.
Please explain how options and dividends are taxed. Are you liable for 30% short term gains tax for each transaction? Do you pay your taxes on transactions once per year or monthly, quarterly? Thanks for the info
I'm always fascinated by what would essential be the parallel of these covered call strategies in terms of risk profile, i.e. selling puts. Would love to see you do a video discussing pros and cons of covered calls vs selling puts, net deltas being equal (a covered call at 30 deltas would net +70 deltas -> Selling a 70 delta put would net +70 deltas, and an in the money covered call at 60 deltas like this video would net +40 deltas -> or selling a 40 delta put)
It can happen, but you need a massive rip. I had it happen only once in 20 years of doing this. My FRO shares got called back in 2007, but that was a major rip. The stock doubled, and split off a whole extra company giving shares to every shareholder, and the dividend was paying like 30%. Just a dictionary definition of business success. On the other hand I have been underwater on a SPY contract for 6 months, still no call away. The stock is 520 and I have been at 500 or below for months. You have to put yourself in the other guys shoes, to imagine why he would be willing to tear up the contract in favor of the holding the shares. Thanks.
@@BrisLS1 is this your preferred strategy? I imagine you only do this for the premium and don’t care what the stock will do really? Have you ever tried it with leaps instead of holding the underlying?
@@BrisLS1 great strategy on the SPY... I guess you keep rolling to avoid being assigned?? A great change of perspective to holding a stock "underwater" rather than thinking its a losing trade. You can still make lots of $$$ selling ITM even if the stock price is down.
@@ciaragail5865 Yes, thanks, I just roll and roll for years sometimes, collecting the dividend and sliding up the option chain. So I get a percentage of the stock appreciation, and a part of the option premium. This week, I am back to a true covered call, as the shares fell below my contract. It’s a compromise, some insurance from losing on pullbacks, but giving up some of the alpha. I have other super bullish plays that I wager smaller amounts on. Thanks.
@@andrewthomastaylor Thanks, yes, “poor mans covered call” is a strategy. But that has a lot of risk on a rip or a crash. If we enter a bear market, ( like this week has threatened) that leap could go to zero. I can hold SPY shares for as long as it takes to get back up.
A couple of questions. When i hear of people getting protection for trades like covered calls they often talk about buying puts so if the price drops the loss is capped. I am not sure how an in the money call qualifies as protection. What are you protected from? If the price drops you still have your shares and are now stuck generating less premium or waiting. If the price rises you now can buy fewer shares. The second is that a lot if channels, including this one, have analyzed at the money call ETFs and noted over time capital often erodes. How is this not worse over the long term? What timeframe do you imagine doing this over? This seems like a reasonable strategy for specific stocks during very sideways markets. Outside of that I do not understand how you will not erode your asset base in the long run.
Surely your capital depreciates over time? Much like the ATM covered call etfs. (which seems a much easier way of destroying your wealth if that's what you believe it). This might be a Good strategy for the terminally ill perhaps?
It doesn't make any sense to sell CCs ITM (vs ATM or OTM) "for income" because you could've just sold your shares for the intrinsic value amount. Its only use case is if you really think the price of the stock will drop significantly and/or stay down until expiry. If you want to sell CCs specifically for income then collecting the most extrinsic value/premium (ATM) or at a higher strike if you think it'll go up a bit is the only thing that makes sense otherwise.
paper trading, then swing trading, options are typically when you believe your swing trade strategy is gold and you can get more on an edge with money that is worth risking. Options are definitely not for those that have a day job.
Get that mindset under control bro. No risk, no reward. Educate yourself on the process, make INFORMED trades. It's the same as driving your car to work, all that's involved including risk. All relative. Don't let fear dictate terms for you. You are here watching this video for a reason.
@@TheGoreforce I ONLY trade DURING my day job bro! I thought that years ago, but I trade LEAP options now. More of a "fire and forget". vs. scalping, intra, or day trading that require my consistent presence.
The biggest drawback of this strategy is that having less capital in the long run limits the number of contracts you can hold, which can lead to lower income. Please correct me if Im wrong .
The way I figure it, you maintain your capital because you are being compensated / reimbursed for that loss through the Intrinsic value. Only the Extrinsic Value is being taken as income. You would throw the Intrinsic Value back into your pot to go buy more contracts with the same capital.
What happens if the stock price goes further below than the ITM strike price? If the example of $100 to $97 is used, what if it falls to $94? I understand one keeps the contract income of $3, and that for the extrinsic (? accumulated value of time?) we end up with $5 per share, so we break even at $95 if it drops there, and -$100 if it drops to $94?
@@clamdiggerme So essentially just sell it back early if it gets close to there - yet, because of time value (I think) when one does this you must pay back what is left of that, and it may be early in the week, or even the last morning, but it does zing one anyway. Yet, better that than ride it down further.
I'm also curious about everyone's thoughts on taxes, with the 7-Day example and getting the shares exercised, you will have to pay taxes on the premium (which will be more since it's in the money) and also you will not have the benefit of deducting the losses because of the wash sale rule
@@fennell6The wash sale rule accounts for the disallowed losses in the basis of the repurchased shares. So it doesn't actually hurt in the end. It just doesn't allow you to use the losses from XYZ against the income from ABC.
I often will sell in money calls for a $20-60 profit per 100 shares within a week of Ex-dividend for a 0.7-1% dividend. They will pay $70-100/100 shares and will often get called away on the stock. You lost the dividend but made $25-60 within a week on 100 shares of a $50-100 stock.
Very interesting. Shouldn't we also take into account capital erosion in the profit calculator according to our cost basis?
Or is this effectively covered in the intrinsic value?
Thanks for the great content
It is not needed since he only uses extrinsic value to calculate returns
@@Klaster961makes sense thanks for the reply 😄
Thanks for the video. Can you get called early? Like right away? Is this different than what the global x ETFs (QYLD, ,XYLD, etc) do on a monthly basis? Right now I prefer to just dollar cost average out of the money covered call ETFs like SPYI, QQQI, FEPI, etc as a part of my income portfolio and pay the expense fee unless I see other people can do it better on their own. Are folks having better luck than 12% and 14% returns annually?
You are good with those ETF's. If you for example, wrote an ITM call on the S&P last October, you would be kicking yourself every day since. The market has gone ballistic upward, so you would have lost all upward movement, and only collected a small amount of time premium. If instead, you work with XYLD, they have a much bigger position and a much higher likelihood of being able to see the rip coming, and an ability to adjust time frame, and a steady supply of new money hitting the fund. I like the funds a lot more than my own S&P Covered call position for these reasons.
@@BrisLS1 Thanks a lot for the thoughtful feedback. I know some people are all about doing their own options but I just assume go this route. I didn't know that about XYLD so appreciate the new info.
thanks... great info.... so if your shares get assigned at the lower ITM strike price.... that would trigger a wash sale... so potentially you couldn't buy the shares again for 30 days?? am I correct in my thinking?
I have the same question
Please suggest high Div stocks or etf that we can do the wheel on it. Thanks
Some of the Yieldmax ETF’s
Trade options
Maybe possible to hedge by buying puts on MSTY or JEPY etc
Hi Joe @12:20 just trying to understand, so, in this case, we are actually purchasing 100 shares at 440$ current value but selecting a lesser 435$ strike price? our shares will be called away right anything more than 435$? at the expiration? and we continue to use the same strategy? so let's say the shares go down less than our strike price of 435 assume 420$ at expiration and we don't close then we will be still own those shares right?
Nice explanation, Joe! I am getting ready for retirement, and I use ITMs almost exclusively for income with downside protection.
What is ITM.
In The Money.
Hello what do you do if the market goes below your covered call at expiration date and keeps tanking? What is your next move? It is not very clear in this video thanks 🙏
@@saimiride You basically would have to hold your shares, ride out the downturn. At this point tough, you can 'strategically' maneuver and sell Out the money calls, either at or a bit above your 'cost basis', if the premium is worth it. Depending on the size of the downturn, you may even sell calls a bit 'below' your cost base to get a decent premium...but you have to keep a keen eye because you don't want your shares to get assigned (taken away) at a lower cost than what you purchased (aka your cost base). Hope this helps...
@@ralphpal Don't mean to be unkind, but if you do not know the what ITM, ATM and OTM do some research before trading options.
Awesome video!!! Have you thought of scenarios with a combination of colar strategy and covered call against the same 100 shares?
A lot of people don't understand covered call funds. Because they're bracketed as ETFs (and their performance tends to be reported the same way) people tend to think of them as traditional investment trusts when they're actually limited liability insurance vehicles. The terminology gives it away - liability, cover, premium, etc, and the regulatory treatment is essentially the same. You have to think of them in those terms, but most investors don't understand insurance. Worth considering a bit of research and comparing your underlying asset to a ship and cargo at sea.
Joe, thanks for all your educational videos. Wash Sale Rule question.
If you buy shares at 100, sell ITM at $95. Stock is assigned (taken away from me at $95.
If I want to repeat the process with the same stock, and I buy shares back at $94.99 or less I get hit with Wash Sale Rule don't I?
Something similar just happened to me when I sold a CC , bought it back lower, stock bounced, sold CC again, all with same expiration date, instead of getting my premium, I actually lost money selling the CC a second time.
I have the same question
Hi Joe, you are buying the shares before selling the ITM calls right? Also, I think you made a mistake in your prior video on how SPYT works. I explained in a comment on that video. Thanks for the great channel.
The only problem with ITM calls of the stock rebounds quickly and tremendously you get none of the upside recovery which could be substantial. Thousands of dollars. Or if the stock goes up you get none of the appreciation other than the premium you received. Its good if the price drops but not when its going up. So you guessing you know that the market is going down (direction) and the time it is going down.
The point of this method is if you think the market is going down. If you think the market is going to go up, then sell OTM covered calls.
I understand the point but I have been burned time and time again to the tune of 50k thinking the market is going down with ITM calls. When we know the market goes up most of the time. Im not a perma bull or bear but just trying to time the market is terribly tough. I have tried it for 10 years. I would do CC out the money you get some upside and the premium will cover some downside but if you are looking to sell the stock anyway soon then ITM CC is definitely the way to go.
But if you do in the money, your shares are gone if stock price did not drop, right? So whay do you do next time?
Please explain how options and dividends are taxed. Are you liable for 30% short term gains tax for each transaction? Do you pay your taxes on transactions once per year or monthly, quarterly? Thanks for the info
Need talk with ur tax advisor also can Google short term rate and long term capital gains are taxed depending on ur bracket
I'm always fascinated by what would essential be the parallel of these covered call strategies in terms of risk profile, i.e. selling puts. Would love to see you do a video discussing pros and cons of covered calls vs selling puts, net deltas being equal (a covered call at 30 deltas would net +70 deltas -> Selling a 70 delta put would net +70 deltas, and an in the money covered call at 60 deltas like this video would net +40 deltas -> or selling a 40 delta put)
What is your strategy around tax time for a brokerage account?
Would the shares most likely get called away? Or at least have the risk of being called away by an option buyer before the expiration?
It can happen, but you need a massive rip. I had it happen only once in 20 years of doing this. My FRO shares got called back in 2007, but that was a major rip. The stock doubled, and split off a whole extra company giving shares to every shareholder, and the dividend was paying like 30%. Just a dictionary definition of business success. On the other hand I have been underwater on a SPY contract for 6 months, still no call away. The stock is 520 and I have been at 500 or below for months. You have to put yourself in the other guys shoes, to imagine why he would be willing to tear up the contract in favor of the holding the shares. Thanks.
@@BrisLS1 is this your preferred strategy? I imagine you only do this for the premium and don’t care what the stock will do really? Have you ever tried it with leaps instead of holding the underlying?
@@BrisLS1 great strategy on the SPY... I guess you keep rolling to avoid being assigned?? A great change of perspective to holding a stock "underwater" rather than thinking its a losing trade. You can still make lots of $$$ selling ITM even if the stock price is down.
@@ciaragail5865 Yes, thanks, I just roll and roll for years sometimes, collecting the dividend and sliding up the option chain. So I get a percentage of the stock appreciation, and a part of the option premium. This week, I am back to a true covered call, as the shares fell below my contract. It’s a compromise, some insurance from losing on pullbacks, but giving up some of the alpha. I have other super bullish plays that I wager smaller amounts on. Thanks.
@@andrewthomastaylor Thanks, yes, “poor mans covered call” is a strategy. But that has a lot of risk on a rip or a crash. If we enter a bear market, ( like this week has threatened) that leap could go to zero. I can hold SPY shares for as long as it takes to get back up.
A couple of questions.
When i hear of people getting protection for trades like covered calls they often talk about buying puts so if the price drops the loss is capped. I am not sure how an in the money call qualifies as protection. What are you protected from? If the price drops you still have your shares and are now stuck generating less premium or waiting. If the price rises you now can buy fewer shares.
The second is that a lot if channels, including this one, have analyzed at the money call ETFs and noted over time capital often erodes. How is this not worse over the long term? What timeframe do you imagine doing this over?
This seems like a reasonable strategy for specific stocks during very sideways markets. Outside of that I do not understand how you will not erode your asset base in the long run.
0:10 my inner OCD got triggered: every single bill has to be uniform in a stack for me. 😂😂
You can make it simple by just selling cash secured put for exact same effect with less transaction costs
What do you do if the stock price goes below the ITM strike price? Do you roll the strike down and out?
right i was thinking same and we do not execute the contract before the expiry data
Surely your capital depreciates over time? Much like the ATM covered call etfs. (which seems a much easier way of destroying your wealth if that's what you believe it). This might be a Good strategy for the terminally ill perhaps?
🤣
I do this consistently simply for income.
It doesn't make any sense to sell CCs ITM (vs ATM or OTM) "for income" because you could've just sold your shares for the intrinsic value amount. Its only use case is if you really think the price of the stock will drop significantly and/or stay down until expiry. If you want to sell CCs specifically for income then collecting the most extrinsic value/premium (ATM) or at a higher strike if you think it'll go up a bit is the only thing that makes sense otherwise.
@djayjp Instead of Selling CSPs, Buy 100 shares and sell a CC at the CSP strike price. You can collect more premium than the CSP.
First to view! I wish I were as brave as you in selling options as you are.
paper trading, then swing trading, options are typically when you believe your swing trade strategy is gold and you can get more on an edge with money that is worth risking. Options are definitely not for those that have a day job.
Get that mindset under control bro. No risk, no reward. Educate yourself on the process, make INFORMED trades. It's the same as driving your car to work, all that's involved including risk. All relative. Don't let fear dictate terms for you. You are here watching this video for a reason.
@@TheGoreforce I ONLY trade DURING my day job bro! I thought that years ago, but I trade LEAP options now. More of a "fire and forget". vs. scalping, intra, or day trading that require my consistent presence.
The biggest drawback of this strategy is that having less capital in the long run limits the number of contracts you can hold, which can lead to lower income.
Please correct me if Im wrong .
The way I figure it, you maintain your capital because you are being compensated / reimbursed for that loss through the Intrinsic value. Only the Extrinsic Value is being taken as income. You would throw the Intrinsic Value back into your pot to go buy more contracts with the same capital.
You are a genius
Between Capital loss over time and short-term gain taxes this method doesn't seem very profitable to me.
What happens if the stock price goes further below than the ITM strike price? If the example of $100 to $97 is used, what if it falls to $94? I understand one keeps the contract income of $3, and that for the extrinsic (? accumulated value of time?) we end up with $5 per share, so we break even at $95 if it drops there, and -$100 if it drops to $94?
Correct. You will have a $100 unrealized loss, and the shares would not be called away.
Why don’t you enter a buy to close limit order to close the option if it drops close to the strike price?
@@clamdiggerme So essentially just sell it back early if it gets close to there - yet, because of time value (I think) when one does this you must pay back what is left of that, and it may be early in the week, or even the last morning, but it does zing one anyway. Yet, better that than ride it down further.
From major padres, Bay
This is the first video to confuse me in a long time
Still confusing for me, does this strategy means that most of the times the option is exercised and you lose your shares? What about taxes?
I'm also curious about everyone's thoughts on taxes, with the 7-Day example and getting the shares exercised, you will have to pay taxes on the premium (which will be more since it's in the money) and also you will not have the benefit of deducting the losses because of the wash sale rule
It is taxed as short term capital gains
@@fennell6The wash sale rule accounts for the disallowed losses in the basis of the repurchased shares. So it doesn't actually hurt in the end. It just doesn't allow you to use the losses from XYZ against the income from ABC.
What about the upside, stock at $100 and sold calls at $96 but the stock price went up $105, what will we do in this case?
Nothing. Just keep the premium. This strategy is for potential market going down.
I often will sell in money calls for a $20-60 profit per 100 shares within a week of Ex-dividend for a 0.7-1% dividend. They will pay $70-100/100 shares and will often get called away on the stock. You lost the dividend but made $25-60 within a week on 100 shares of a $50-100 stock.
Sup coach
Bro… it’s the same as a put.. just write the put
A lot of times it’s a little more premium to use the call.