What Is A Covered Call & How Do I Trade It?
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- Опубліковано 15 вер 2024
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I remember watching this like 4 months ago and literally nothing made sense. I'm glad I finally understand this thing through and through.
Listening to this the first time sounds like a foreign language
Thats what i am saying lol
Lillian Bradley me right now
I do not understand this at all
watch a guy called "Kamakaze cash" talking about Theta gang. He explains this very easily in a way that's easy to understand.
@@rage2045 options trading is like learning another language. Put the time in and it will be easy eventually
If this video was supposed to be for beginners, it drastically failed
I recently upgraded my brokerage account for margin,spread,covered calls/puts,and secured cash puts,thank you for helping me understand how secured calls work,im sure secured puts are the opposite.
They are the same ironically, not the opposite. He mentions that at the beginning. Both are long delta, unless you call is ATM. They are both short theta positions.
As I pain myself studying for my finance exam, the ever-familiar led zeppelin intro made this all the more bearable. thank you.
Nice! Glad to help!
I’ve been a few months trying to understand how the coverage stocks/options work, thanks to you finally I’m getting it
You only talked about OTM covered calls, but there is also the ITM covered calls strategy.
Any references or videos you can point us towards? Just weighting the risk and benefits
You are the best. Covered calls are my things and you explained them very well.
learning the stock market language and trade practice and understand what it takes to trade
Tastytrade should do another video....this was a little all over the place
Well explain very detail of a cover call comprehendible
The explanation was really easy to understand with the graphics!! Thanks for putting them in. You got a sub from me.
Thanks, but you should also talk about the downside, like what happens when the stock price drops below your cost basis.
what happens is it stings like the honey bee. I just found out. then you can sell additional covered short calls on that same equity as long as it doesn't go to zero.
I studied finance at a well known university and I almost forgot I learned about this in one of my classes 😅
I think I finally understand what a covered call is!
Not me
I LOVE your videos, but you neglect to mention the total potential loss (assuming the drop) is less with the option and buying the stock long, and its because if your intent is to go long through selling a put you also have an "opportunity gain" buying the stock at a discount (of course you couldn't roll the option over AND excersize it), also it prob better to use a short put to enter a position long than a limit order as you lower your BE.
Good delivery. I would just advise against using numbers that are all divisible by each other.
Ha ha, it's complicated enough for many beginners to understand without having the complexity of dealing with fractions, but you could have gone on to explain your point in more detail, there are others here who can deal with real numbers.
Great job on this video! I started doing this recently to try and lower my overall average of purchased stock
Yes I believe the stock market is random and not influenced by any computer Algo that dictates which direction should the price go for maximum profit.
medicore presentation
Good explanation. Really clear..
Great explanation of Covered Calls. Thanks.
What happens if stock goes up and strike price is hit? You have to sell the shares?
Nope! Just because the stock breaches your call strike before expiration does NOT mean you will have to do anything. It's only when you get assigned on the contract (and your broker will notify you when this happens) where your shares will get called away. This almost always happens on expiration day if your option expires in the money.
I don’t understand why it’s “the best possible scenario” if the stock price blows past the short strike price. Is this only if you planned on selling the stock anyway? Is it a bad idea to do this with stock you plan on holding for a long time bc it’s gonna cost more to buy it back if that price does go up and you get exercised
If you want to hold the shares for the long-term and don't want to risk assignment, you can simply roll the short call out in time to the next expiration cycle once you reach about 21 days from the current expiration. You'll be able to perpetually do this for more and more credit.
Thank you for your informative presentation. I’ve watched many video about cover call and all of their examples always buy 100 shares in the same time with selling call option of that particular stocks. But from your presentation and the answers of the previous comments, can I assume that I can sell call option anytime later if I ‘ve already owned 100 shares and tastyworks will automatically match my selling option with the shares that I own?
Absolutely game changing! Thank you
Covered calls are a great way to go with stocks that are about to go ex dividend too.
So...you own the stock...you collect the dividend in about a month when the dividend pays out. During this waiting period...what? Are you selling calls on your covered position?
Chris O'Dowd - Absolutely. Watch for Earnings. You get punished if you miss.
Or it it’s a home run and your Covered Calls go in the money (ITM) and get called away.
That's just one out of a myriad uses of CC and it's just wrong that the assumption is bullish. I regularly use CC during bear markets on long term investment stocks. The downtrend reduces the likelyhood that my stocks get called away and I can keep the premium. Also you can use CC to sell off stocks which you don't want any more by just selling ATM CC in a bullish market.
This is all true, but from a delta perspective, it's a bullish trade because the net delta is positive. You want the stock to go up to make the most amount of money possible.
Smart money writes options. Suckers buy options. Covered calls are essentially free money unless the value of your stocks go down so far that it offsets the premium you received when you wrote the call. At that point, you could just buy your call back insanely cheap, sell all your shares, and still may end up breaking even or at the very least significantly reduce the loss from your stocks losing value. That's called hedging, folks, and more people need to start learning how to do it. Unless you're insanely bullish on your stocks, you should consider writing calls on them to protect yourself from loss and generate extra income. I've been writing calls on my 1,000 Amazon shares since they were trading at $350. On top of whatever I earn from the share price increasing, I pull in an extra $40,000-100,000/mo just by writing calls on them. Only been hit with an exercise on one single contract in the several years of doing this as well, and it was no big deal - I just bought 100 shares back again.
Dang! Mike is jacked. 💪
If you sell covered calls in a bull market, wouldn't you need more capital to buy back the same number of shares to cover again? The premiums received won't quite cover the increasing share prices. How do we deal with that (I'm aware of the wheel strategy to get better than market prices, but even that is prone to this problem)?
Well then ideally you should be selling covered calls about 30 to 45 days from expiration. As the stock price rises over time, you'll be continually selling covered calls for greater and greater premium.
Super helpful video Mike...Thank you!
Very well explained, Thanks Brother!!!
Great simplistic breakdown.
Hi Great Video Thank you!
Question, if the Stock goes to 120, you only recive the $1500 +$200=1700, right? You will loose the difference between $115 and $120 = $5×100(shares)=$500 - $200(premium) =$300.
In other words. If you sell your shares in the open market at $120 You would have a profit of $2,000
But you sell a covered call and only make 1,700 although the Stock went higher?
Correct - with a covered call you're exchanging your unlimited upside potential for a guaranteed influx of cash generated by the short call.
Your strategy is so informative...
Great video. I'm learning a lot. How does the cost basis reduction work if you have multiple tax lots? Say you bought 10 shares at $10, 50 shares at $15 and 40 shares at $20?
I would just base it off the average basis of your shares and go from there.
What strategy would you use if the stock price tanks? I understand the upside and collecting premiums, but if the stock drops to $80 you are holding a CPS average at $98 (with premium adjusted). Would you buy more stock and average down? Sell more calls or puts? Abandon the position and take the loss?
Thank you for your time, liked the video and now SUBSCRIBED!
Why sell a naked call? Wouldn’t buying a call with money from selling a put give most upside to downside risk with a bullish outlook?
Thanks for the video! I feel like I am missing something! If I sell a covered call to an out of the money strike price aren't I guaranteed not to lose money? The stock can go below your basis but it will be unrealized and since you still hold the stock you can further sell covered calls. The only guaranteed loss I see is if you sell calls with a strike price that is below your cost basis (with adjustments from other call premiums).
Good question! You collect the short call premium up front, so assuming that expires you are guaranteed that cash as a basis reduction against the shares if you hold the trade that long. You aren't guaranteed to profit, as shares can collapse and never recover, but you are guaranteed that premium collected from selling the call, regardless if it expires ITM or OTM.
And we can sell call option of that stocks repeatedly as long as we still own 100 shares of that stock, right?
I've been following dough on the option trading for a while. I did fairly good on the quizzes. I would like to find out more on how to tell if the implied volatility would make that stock a good stock for an option. Meaning how high or low the numbers has to be in order to make the trade work in your favor from the start.
Brian,
I would check out IV Rank and IV Percentile - those are the contextual indicators we look at to determine whether implied volatility is high or low for a given time period.
tastytrade
This was a very good explanation! Thank you
excuse me sir its not 50/50 in regards to time. Most the time its rising slowly, and some fine days its crashing ham
There is a slight positive drift over long periods of time historically, but in a 45 day window or less, it's very random which is why we prefer to sell premium and reduce our cost basis in preparation of the unknown.
Can you do mini option covered call in small accounts?
Thank you Mike. I have learned something today.
Hello: I find your presentation very clear and concise. Very educational. Never a dull moment. Question: Do I need to place the two trades with the same broker? At the moment I am trading Stocks with one broker (restricted to stocks trading) and trading Options with another. Please advise. Thanks.
Well explained, thank you
The whole series is great! Highly recommended.
If the price of the stock goes down below the strike price, I know their is a paper loss. But do I incur a real loss? Do I have to sell the shares? Or do I keep the shares. Keep the premium. And just hold my position as a paper loss with the hopes it will rebound.
I have not been able to hear that explained.
I notice that my stock was not called away when it passed the opt strike. I assume they normally are not exercised. If I buy it back I lose my premium and the stock is uncovered. If I just let it expire I don't lose the premium in trying to buy it back, I just don't get the amount over the strike price???
I've been studying covered calls for about 6 months and have come to the conclusion that unless the market is stable and bullish (sure isn't these days) covered calls are not worth the risk and effort....
Great explanation
Great video! Thank you!
I wanna sell cash secured naked calls for income. Good bad?
Against shares of stock? Something we'd consider. Naked with undefined risk? Not really something we'd consider. We usually sell a put instead to get long 100 shares of stock, and then sell a call against it to continue to reduce cost basis.
@@tastyliveshow sell a call and sell a put... very interesting. After 4 years, I have now started to see the big picture of selling options.
Hi I am a little confused. If I buy a call option, do I need to buy the shares to have on hand also? Then when I sell the option when is it safe to sell the shares? Is there a time limit on the buyer from wanting to exercise his right to buy the shares?
enjoyed the explanation , thanks . my omly question on this example if the stock price come below 98 or 90 at expiration , i still keep the premium & the option expires , is that right ? however because the share price ls low will have some unrealized loss , please comment , thanks again for what you do to help new comers in the stock market
Yes, correct. Your short call will expire worthless, effectively hedging a portion of your unrealized losses on the shares. You can then sell another call to continue reducing cost basis, just don't sell it below your overall cost basis so that you can still profit if the stock rises back up.
@@tastyliveshow thanks for clarifying ....
nice explanation sir mike more power to you
The EMH is wrong by the way - otherwise no one could beat the market over time, and plenty do. This means you can create an edge before you enter the trade by proper filtering.
It's not that the EMH is wrong, but that it's describing an equilibrium state that can be perturbed by new information. Think of it like the first law of thermodynamics -- unless you put more energy (information, money) into a system then market should reach a point of equilibrium.
Professional traders don’t beat the market 95% of the time. Does that mean some do? Yes but some people also win the lottery and make it to the nfl.
It seems to me that the situation described is the special case of a buy-write. If I initially bought the shares at $120, but the stock is currently trading at $100, I should be leery of the "best case scenario" described here. Or maybe that's the anchoring effect? I expect the stock price to rally because I had initially thought that $120 was a bargain, but I should consider whatever it was that cause the stock price to collapse more closely. Maybe I should be grateful that the covered call made me only lose $5 per share?
Yeah if you're legging into a covered call after the fact, you need to be aware of your cost basis. If you sell a call below $120 you could lock in a loss if the stock rallies hard from there. That is why we deploy covered calls to enter the trade, so we know we have enough space for the stock to move, and we collect a good amount BEFORE the stock sells off, if it does. Ideally it rallies and we keep the premium and make money on the shares at the same time.
really helpful, thanks a lot!
Hi Mike, thanks for the awesome video! I learned a lot. Quick question: do you close out a covered call position at 50% profit like you do with many other options strategies?
Typically yes - but there's no upside risk with a covered call so I don't mind holding longer - if I'm trying to keep the shares I roll out in time and up a few strikes for a credit before it goes ITM - just realize that if you've got 90%+ out of the short call it's really just capping upside for no reason - up to you though!
Might be a dumb question but just want to confirm any profit from selling a covered call basically will just average your position down ?
And also as far as taxes is this considered profit only until u sell your full position or straight short term tax as soon as you average down ?
Thank you. You seem like a really nice fella.
So just to be clear. In this case if the stock price raised above the strike price and was executed, you would lose 9800 dollars in the first example and 9500 in the second example correct ?
That is incorrect - max profit on a covered call is the distance between the purchase price of the shares and the short call where your profits are capped, + the premium received for the short call.
More simply, max profit is the distance between your cost basis and the short call.
Got a question for Covered call . If I bought 100 shares at $5. Then I can sell a covered option for strike price at $11 for July 1. If the price goes over , I don't lose my $500 dollar investment right. I will be making total of $500 + premium price + $difference between $(11-5) on expiry date right or will I lose that $500 investment.
When you're purchasing shares you own them, so you can sell them at whatever price the market is at. You would not lose the initial $500 investment if the stock goes to $11. You would be able to sell out of the shares at $11 per share, netting a $600 profit on the shares, plus whatever premium you collected with the short call sale.
Found it very helpful (I'm a French financial markets student), where can i find other option strategies explanations (more sophisticated) ? Thank you in advance!
Thanks! Glad you liked it!
Check out the tastytrade learn page!
www.tastytrade.com/tt/learn
Think I need covered calls for dummies. Naked stock? Extrinsic value?
As a total clueless options trader, Td will only allow me to
BUY!!!! covered calls, not sell them.
Can I please please please!!! get an explanation of BUYING!!!! covered calls,
like if I have 1 contract at an underlying that is currently $100.00 per share, the strike price is $110.00 how much money would I make if I closed the option at $110.10????
Thats 10 cents over the strike price,
Im just try’n to understand this.
Navigating through the td options chain twilight zone is my next project.
hmmm. more I go in depth with options[spreads]. the more it make sense to buy option and not stocks. why buy 100 shares when I can sell put.
Can I sell the shares before the contract expires? and if I do so, I don’t get the premium I was supposed to get?
Yes you can, but you'd want to close the short call too. if the stock price rises significantly above the short call, most of the extrinsic value will be gone and you'd be at max profit for the position anyways.
If I have a covered call, is there a chance that I can lose my 100 shares?
NICE PRESENTATION.
Subbed
damn, this is very good info
So do you loose your 100 shares if the pps goes above your strike and the call is exercised?
Those 100 shares still cost a bundle!
Your shares would be "called away", but you would realize the max profit of the position, which is the distance between where you bought the shares and where you sold the call, + the credit received from selling the call.
How new ipo stocks?
I am confused why buying covered calls and letting them expire and get exercised for a good profit is a bad idea, if you don't have any attachment to the stock and are not really worried about losing future price appreciation? If I buy a $15 call for $.80 when the stock is at $13 - would I not make $280 if it expires and reaches past $15???
You would - You'd be selling the 15 strike call for $0.80 in that example - some people like to hold onto the shares for over a year for tax reasons so they may elect to roll the strike out in time or down if the stock goes down, but nothing wrong with profit from the initial trade and exiting if it occurs.
Wish I knew this years ago
3:00 in this case, why not just sell futures? Sell your stock at $115/share in the future to get a $1700 profit guarantee right? (even the stock price goes down). Can someone please explain to me why would anyone choose an OTM covered call over futures?
You need the stock price to go up for you to make that money, and you don't know where the stock price will be in the future, so all we can do here is reduce our cost basis by selling the call if that is our intention, and we're ok with reducing unlimited upside profit potential in exchange for selling a call to reduce cost basis, which is guaranteed if we hold the call to expiration and let all extrinsic value decay. Totally up to you though!
Great explanation, but many folks are not going to understand all of the financial language used.
So what happen if you sell a covered call and the stock never reaches the strike price before it expires.... Do I just keep the money from the first contract and the option goes away?
That's correct - you can then sit on the stock or sell another call.
if the strike you sell is 115 and they excercise, but you bought the shares at 100, aren't you still down 15$ per share?
You are not.
The only way the call can be exercised is if it is ITM, which means the stock is above $115.
If you purchased at 100, you'd have profit from 100 to 115 ($1500) plus the premium collected from selling the call. The trade would be profitable overall.
Put another way - The long shares at 100 would be offset by the short shares at 115 if exercised, leaving you with a net difference of $15 x 100, + short call premium collected up front.
I have one question what if i sell option against my stock on its expiry date. Will i get premium if strike price doesn't get hit?
Yes - when you are FILLED on a short option trade you receive the premium at that point in time. Profit or loss is determined when buying BACK the short option and what value you're buying it back for. If you sell an option with 0DTE and it expires OTM, you keep the premium you collected when you were filled.
Wow 10 covered calls videos in and I still dont understand. Can anyone explain this to people like they are 10??? So frustrating..
I've bought call options but never a covered call and this sounds crazy I'm so lost
But you HAVE to sell it at 115 right ? So the higher the stock the less profit you make because your option is futher ITM ? Or do you buy back the option + sell the stock yourself at 115 ?
If you sell a 115 call against your shares, your upside profit potential is capped at 115. You can buy back the option and sell the shares at the same time to realize max profit at expiration if there is no extrinsic value left in the short 115 call.
@@tastyliveshow Thank you for the explanation.
Hello, when you write a covered call on Index ETFs such as SPY on a non retirement account, is that taxed under the 1256 rule? Thanks!
That's a great question - I would contact your tax accountant to double check, but I believe that rule is only for broad based cash-settled indices like SPX, not stock settled indices like SPY.
Hi Mike
If the stock price at expiration is higher than the strike price, we forfeit the shares and keep the premium received. Assuming that the underlying stock paid dividends and the ex-div date was before expiration, that means we also keep the dividends--correct?
On the other hand, if the stock price falls below the strike price, we retain the shares, premium and any dividend payment at expiration. Is this also correct?
Yep that's all correct! The dividend payout is based off who owns shares on the ex-date, so you'd still be paid out that dividend, even thought the stock price drops by the dividend amount to prevent arbitrage, so it's a wash in the near term.
Yes, you are correct.
Conversely, if the stock gets called away before the dividends date whoever holds the stock receives the dividend.
your great dude!!! i just subscribed
It's all clear but who buys this call and why?
Someone can buy the call for any number of reasons...maybe they're super bullish on the stock and want to purchase calls. Or perhaps buying that call from you actually closes out one of their existing positions. Or perhaps it's just a market maker doing their job by taking the other side of your trade.
Assume the call expired and the share price is now $99, what are my next options? Pun intended. Should I wait till it gets back up to 100 or just sell another option at this price?
You can do whatever you'd like - selling at 99 is going to yield a similar credit collected compared to selling at 100, especially if a few days pass.
isn't this the same as call spread?
It is not - a call spread would involve a long call, and a short call in the same expiration. A covered call is 100 shares of stock + a short call. It is similar in the sense that if I were to exercise the long call of a call spread I would be left with a covered call, but different in the sense that a covered call has a much higher probability of success because we reduce our cost basis from the get go as you see here.
Did a cover call in FB. Strike price was 165, went up to almost 172 and still did NOT get called away:/ Have no idea how much it had to go up over to get called. As this stock goes up and goes over my strike my profit goes way down. my DTE was over 3 months. I guess only use these things with tighter DTE? Or maybe im.close to getting called away idk... thought 7 points over strike would do it
the probability of being called away increases as extrinsic value in the short ITM call gets close to zero - you likely had a ton of extrinsic value left, which means there's not much of a point for the counterparty to exercise their option and turn it into stock - they'd be giving up all of their extrinsic value - they might as well just sell the call if they want to get out, which wouldn't affect you.
@@tastyliveshow on the same 165 call. The stock is now at 164.50 and premium is at 12 equaling an extrinsic value of 12. When the stock was up to 172 premium was around 22 equaling an extrinsic value of 15. The main question is, wont this always be the case. Very far out 3 motnh or so DTE covered calls will never really get called away earlly (as time value makes extrinsic value to high to get called away) and you will have to get closer ro expiration?
@@vfxhouse6499 That's correct - as long as extrinsic value is high, assignment risk is very low.
So can I just buy a stock, sell ATM covered calls every ten minutes, and get my money back while still keeping my shares? Is profit a guarantee? Cause even when the price falls, I could just sell calls over and over again at the same strike price until the total money collected from selling calls reaches the cost for buying the shares in the first place.
Not really - for you to close the short call you sold, you have to buy it back. You'd be paying a similar amount that you collected from selling it in the first place if you're doing it 10 minutes later.
@@tastyliveshow What I meant was, everytime a call that I sell expires (e.g within 10 mins.), I would just sell new ones over and over again, making money just by selling calls. What do you mean I have to buy it back? Don't option contracts become worthless at expiration? (Unless the stock price rises above the strike price which in that case, I'll just have to cover the difference with the shares that I own, but I still get my premium as profits)
@@danieljohnsopardenilla997 If you are selling a call against 100 shares at 2:50pm CST every Friday that expires that day, then yes you'd keep that premium if it expired worthless. If it moved ITM through expiration you'd lose the shares.
@@tastyliveshow Yeah I'd lose the shares, but then I would get the max profit right? 4:59
When you sell a call against long stock, is the value of the contract working against you as your underlying increases in value?
Is it therefore better to wait for the stock to trade sideways before selling the call (and give up some of the time decay)?
Not necessarily - there are three main greeks that affect an option's price - theta (time decay), delta (directional changes) and vega (implied volatility changes).
If enough time passes, that short call could be worth less than what we sold it for even if the stock has crept upwards.
If implied volatility contracts enough, it can outweigh the bullish direction of the stock price.
There are plenty of scenarios where both the short call AND the long shares can be profitable, but it's also common to see the short call showing a "loss" while the long shares show a gain prior to expiration. At expiration though, if that short call is out of the money, it will be worthless. Even if it's in the money, all extrinsic value will be gone, which is really all we're after anyways, as the short call intrinsic value is completely offset by the 100 shares of long stock.
@@tastyliveshow Cheers for the comprehensive answer!
can I sell Covered call to fully cover my initial investment $10,000 using AT the Money Call?
Lawrence Hiun it covers any profit from the stock, so your only profit is from the call that you sold. However, the premium is usually very high so you can get a good reliable rate of return
so, when you say "Flat" during the first example, you would still be losing $9800 right?
No - if that call was exercised at the strike price, I would keep the $200 I collected up front, plus the appreciation in value of the shares from where I bought them, up to the strike price. It would be a max profit winning trade. The only way you lose $9800 is if you enter this exact trade and the stock goes to $0.
@@tastyliveshow thanks!
Cool
Hey just a question when do you actually get your premium money? when the call is exercised or expired? I sold a call on robinhood but it didn't credit my account with the premium.
You get the premium right away actually. The problem is that to close the position, you have to route the opposite order - in other words, buy it back.
So even if you collect $100 selling a call against shares, if you want to close the call a few seconds later you likely have to pay $100 to close the call.
The credit is added to your "cash" value, but it doesn't increase the actual value of your account.
If the option starts to lose value, THAT is when your account value will start to increase equal to that amount, because now you can buy back the option for a lower debit than the credit you paid, resulting in profit.
Make sense?
So if the option loses money a few days later and you buy it back (Buy to close ) for profit, is it at this point your 100 shares of stock are sold? OR are your 100 shares sold ONLY if it hits the Strike price AND is during the duration of OPEN TO SELL AND CLOSE TO BUY the option???? cheers! @@tastyliveshow
(3:33) You would be "short" those 100 shares. What is the meaning of "short" in this context? You're shorting those shares?
Short call represents 100 short shares of stock at the strike, but since you own 100 shares of stock, your short call risk is "covered" even if it's exercised, which is where the "covered call" gets its name
@@tastyliveshow Got it.
But @ 3:33, he said if he just sold a naked call, he would then be short 100 shares if the option holder were to exercise their option. I took "short" as in everyday language meaning "coming up short," "I'm short $100," or "I don't have any money," not actually short-selling. Or is that what he was implying- to short the shares by borrowing them if you want to cover the naked call?
Correct me if I'm wrong, but I thought you would still have to buy shares before you sell them to anyone, regardless of whether you sold a covered or naked call. Unless, what he really meant to say was if you're the writer of a naked call, then bypass the owning and selling of 100 shares altogether and just short them instead.
See the confusion?