The Secret to Turbocharging Your Covered Call Options Trades
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- เผยแพร่เมื่อ 2 ก.ค. 2024
- Options Trading Workshop: tinyurl.com/4t5w68te
Options Course: • The Only Options Tradi...
00:00 - Intro to Covered Calls
04:23 - traditional covered call strategy
11:03 - synthetic covered call strategy
#coveredcalls #optionsstrategy #optionsincome
SMB Disclosures www.smbtraining.com/blog/smb-...
A conversation about returns while omitting the risks is only half the story
Can’t believe SMB put their name behind a video like this. This guy keeps pumping too good to be true ideas.
Will you elaborate?
He only presents winning scenarios, but not the risk.
The SMB videos are generally very good.
Yeah, I want to see the SHTF scenarios too 😂. Because that’s what happens to me.
Thank you 🙏💚 But it would be very useful to analyze in such videos: 1. Cases when the price falls and what to do with the purchased CALL if its expiration date is approaching. 2. And how to sell a CALL if the price of the underlying asset has fallen. 3. And how to exit the transaction if the price exceeds the strike price of the CALL sold (calculating the loss).
Covered call doesn't work in falling market. You don't execute it!
I do these all the time. Also called the "Poor Man's Covered call" great way to make income, especially with a smaller account.
"Synthetic Covered Call" is what I learned as a "Poor Man's Covered Call" (PMCC). Apparently there's still no standardization around names like these names though, and in a way "synthetic" makes more sense in this case IMO, but they refer to the same trade. And this lack of standardization also applies to what you're referring to as "deep in-the-money" because I don't agree that just two in constitutes "deep" but does constitute "in-the-money" at least.
You would want to know the worse outcome vs the big profit you could net in this video. This channel gives you ideas of making big ROI but it does not talk about the possible loss outcomes. Pls do your homework work everyone. Greed can blind you. There’s no easy money.
Agreed. It’s very important to know your risk before entering a trade.
RvR Risk vs Reward
This seems almost negligent not to address the risk involved in increasing profits
no traders firms don't have an interest in telling the whole story..... like many in trading they want to sell views so they either ignore or downplay risk and problems
I agree, but risk can be managed too. No trader will sit on his hands as a trade goes south on him. Your real total risk is a calamitous event (airplanes are flown into a skyscraper, nuclear war breaks out in Europe, etc.) while the market is closed. You cannot trade to reduce your loss. The market's next open is 3,000 points lower on the S&P and you're facing (and eating) the maximum loss on your position. These are once-in-a-lifetime events, but the remote possibility of a Black Swan event must be considered when you enter a trade. Leverage cuts both ways. Do not overextend yourself. But the odds are that you will be able to put on this trade many, many times before a Black Swan event occurs. Even then, your accumulated profit should exceed your large loss. And if not? You might consider reducing your position size as your wealth grows. Life is a gamble from cradle to grave and in the Long Run we're all dead, aren't we?
Thank you for your great insight and easy to understand examples!
Thank you! This video was clear and digestive to me to understand! Currently selling covered calls on Meta and will look to do a pmcc in the future!
Seriously helpful. This channel is great.
I got to the end of the video and there are huge gaps left out, unfortunately.
What if the SPY closed above the strike of 425 and the person buying your call exercises the call? Aren't we still talking about a $43,000 purchase? Or at least a $31,000 purchase if you end up exercising your $310 ITM call to cover the shares that are due to the buyer of the call. Tough lesson to learn once a new trader realizes that their sold calls don't always expire out of the money.
These are great but there is never an explanation of how to handle the different scenarios that arise.
What happens when the price closes above the call we sold? Or gets assigned?
What happens if the price goes below the call we bought and gets assigned?
I've been using the SCC for over 1 year on QQQ. Overall, it's been a very effective and profitable strategy for me to generate some additional monthly income. Problems arise if the price of QQQ blows past the strike price, which if not managed properly, means you're on the hook to buy the shares of QQQ at market price whereas your cost basis on the short call is the strike price. At the same time the long call would also increase in value which will help hedge this differential, but in the end I don't view this scenario as positive because it's taking away my gains.
Thank you, Seth.
Thank you for this video. What are the best practices for doing this synthetic covered call? What if the LEAP option doesn’t expire worthless?
Great channel. Thanks for sharing
Also tell when to exit from 100 shares and sold call ?
In all your videos please give examples when one should exit from call or put with example
Thanks for your video
Other scenarios like SPY going down should be also explained.
Owning the underlying has the advantage that once can hold it for long duration for price recovery specifically an index like SPY. With a long position on a LEAP if there is a big fall in the underlying, the LEAP premium will melt fast and the short position on the call options may not cover that
I understand this concern, but couldn't you say you're protecting yourself better by going with the LEAPS since it costs a fraction of holding Spy while yield very similar results on returns? So while yes, you're constricted by how long you can hold the position for recovery, you're also not having as much capital tied up potentially. You also technically could purchase a 2-3 year out call that would closely simulate holding on to an equity for 1-2 years before theta starts to eat at it significantly to give yourself a chance for the LEAPS to recover.
You could potentially purchase a 2.5 years 90 delta LEAPS on SPY for $10k vs $43k on 100 shares of the underlying (at a current market price of $434 a share). Say the market falls 50%, you may be down 5k for the LEAPS (worst case possible the whole 10k) but would be down nearly 22k on the underlying. Just my thoughts and a different way of looking at it.
Roll the Leap if there is a further one out and there is ample liquidity
@@individualtrader7017you would roll for a DEBIT when you’re already in the hole???😂
All leaps go to $0 if they expire out of the money 😮@@Yt-user65000
Sorry Seth, this treatment is very incomplete. You can do better than this. In a future presentation, please return with a workup of the pros & cons of this "covered call" approach when we apply it consistently over an extended bear market (same trade but how much would this trade have lost if we followed it during the first 9 months of year 2022).
Much of the profit in this trade is coming from the LEAP, which is strongly benefiting from the bull market result. If that LEAP went upside down, this would be a very different story.
@@eshork Getting upside down in a leap is bad. You can only lose so much but you can evaporate the premium you paid very quickly in a crashing market. The value of the leap adjusts much faster than you can react and you can lose your entire principal in no time. Leaps give you leverage with a risk attached; in a turbulent world you are asking for trouble. so much easier the last ten years.
Risk TLDR: you only risk the price difference between the stock price and your long call strike, but f it crashes, you can feasibly lose 100% of it if you dont cut your losses in time.
The risk of this strategy is in the loss of your invested capital since the lomg ITM call has no intrinsic if the market crashes.
Should the underlying go below the margin on your long call (as in, the difference in price between tje stock and you option to buy it at) it will drop to zero, whereas if you own the stock you only lose the difference.
It is still a better overall strat if you dont care about the stock, since you basically only risk the price difference, but stand to make nearly the same profit.
Its just that relative to the size of the investment, the loss can feasibly reach 100%, whereas a stock is very unlikely to be outright delisted unless the company goes under.
All US three averages are either steep on losses or a rollercoaster ytd. What can I do differently? Buying bonds is not for me, I reckon some people are making a killing with the bears? I cashed out early, now I have less than a 200k to get into the markets with. Any ideas?
Don't be in a hurry to get back in. The market needs several days of strong performance to signal that the downturn might be over; It's a time to be largely, if not entirely, in cash
Oligarchs with businesses in America should be taxed heavy, the economy is going to slow down and the markets with it. Work on your own terms and take advantage of the market anyhow you can
SOFI, TSLA NVDA, I also included MSFT and ServiceNow, as well as some energy plays like WFRD stock.
Its unclear which stocks and sectors will lead the market in the next uptrend. Stay away from the stock market if you do not have guidance from a plannner and investment strategist. My finances have been in order since I got a wealth planner like Monica with a 600 M AUM working for me.
Who is this Monica you speak about? I have been searching for an advisor who can direct us on where the economy is headed next?
If in the case of the synthetic covered call, the May call gets exercised (presuming the stock closes above the 425 strike price), you'd still have to buy your shares of the long January call for 310 (aka $31,000) so that you could fill the order on the 425 call right?
2008- BAC longs were were writing ITM covered calls and nobody was wanting to take delivery.
Seth, you made a big math error for the Synthetic Call Option return. It's really 48.67%! You used the value of the 310 Call, rather than campaign net cost as you did in the first example. So 4,526/9,300. But the Comparison page has different numbers for costs and profits? Why? Also, you should have at least touched on the issue of option decay, even if you were using a LEEP because by the end it was essentially a standard 3 month call at that point.
Thank you, it is very informative. Assuming you are buying DTM call at 310 , and have a covered call at 425, what happens if the SPY rockets to 450, past your 425 Call at expiry, what will the profit or loss be, thank you.
Your 425 rockets to 450 you lose 25 points.
But your 310 also rockets to 450 is now +140 points.
That covers price of $101 , and -25 points, and you have 9 points profit.
It is because even you have one year away call option at 310, you can sell it any time!
why would you not sell a cash secured put first to acquire the shares? so you would get a premium and the shares ( if you wanted the shares) then do the covered call only if you are assigned?
Sell cash security put need alot money than leaf call..ex Tesla 200 do per share..100sharx200...leafe call only few thousand
In this video the the covered call options sold all expired below the strike price . You did not explain what happens if one of the covered calls sold expired with a share price above the strike price . In this case you are obliged to sell your shares to the covered call buyer . Does the 310 deep in the money call option automatically get exercised in this case purchasing the shares at the 310 strike price and then they are automatically sold at the strike price to the covered call option buyer at the strike price ? Is this how this works ?
I had the same questions as the ones above- what is the significance of 7.5% and when would you exit the trade if it goes against you?
The significance of 7.5% is specific to the SPY. The annual average return of the SPY is about 11%, so he's setting 7.5% four months out as a point of where either a) he's very happy to sell, or b) a hard to reach target so the options will expire worthless so he can keep the premium yet still have the premium by high enough to be worth doing. This should be a different percentage with other indexes or individual stocks.
Ya know i would buy a leap put also, that protects downsides and of course sell puts...and when market crashes you not only dont lose but IV explosion makes them more valuable....thoughts???
Works great in an up market. In a down market you could 95% of your capital using this technique.
What happens if the price goes above the covered call strike price with a synthetic call option? I wouldn't have owned the shares. Should I roll the covered call up and out to avoid assignment? Or, will this somehow automatically close itself out without me having to purchase "actual" shares? Thanks.
Should talk about max loss including decay of Time Value of the LEAP and how it is leveraged to a drop in stock price. What if the stock price closes in the money?
Could you also explain the scenario on the synthetic CC - LEAP option if the Covered Call closes or is going to Close "In the money". Please add an explanation of what the exit options would be for that scenario. - Thank you!
you have 3 option:
1 realized your profit by close out two legs
2. if you think the underly will continue to go higher, buy back the short strike, and sell out of the money call for another month.
3. if you think the underly will reverse after the expiration, buy back the short strike, and sell in the money call at where your strike was at for another month out to protect the price from dropping.
A diagonal....Are you using a 75 or 80 delta seth?
Ok, so with the synthetic CC, what happens if spy closes ABOVE your sept. $450?
hey buddy, I have been trading since the mid 90's, full time retail trader since early 2022 (after I sold all of my rentals at what I thought was a market top). I have my own Portfolio margin account and am currently making 128.39% per year (profit divided by average daily Portfolio Margin held). I mainly trade naked premiums with downside hedges and with most all of my money in T Bill since premium sellers don't need to spend capital to enter trades. How can your company boost me to the next level? Right now I maybe spend in about 1.5 to 2 hours of the 6.5 market hours trading, looking for trades, and doing paperwork. This 23 minute video is not counted in the time that I calculate in the 1.5 to 2 hours. Can your company get me to 250%+ per year with the same risk and same time involvement per day?
I have a 2/16 $800 CC on RXRX one week to exp. With one week to go it is now worth $400. I have no intentions of giving that up unless the call shrinks. I may be exercised for a C gain.
I thought i could get some new idea. Proof to be wrong, as with the most video from SMB.
So what happens if you end up having to sell the shares at expiration and don't own them? Would have liked to have heard the worst case scenario as well.
You mean like a naked call?
This is not selling naked call. if that happens, both short call and long call will be exercised at the same time to offset everything.
You will have to buy shares at the market price in order to satisfy your obligation
Or, if you bought a call option, ITM, then you can take someone else's shares at an agreed upon price in order to cover someone calling shares away from you.
@@mjs28s If you don't know that holding a call option can act as collateral to sell a call option, just google it.
Well if you are selling a call at $450 that means you are obligated to sell 100 shares at that price so $45,000. When you buy a call at $310 you pay a premium to have the right to buy 100 shares at the price $31,000. So your total cost if you exercised the call would be $31,000 + premium ($10,300) = $41,300. So if your $450 call is assigned you make a profit of $45,000 + Credit($5.00) = $45,500 then subtract your starting cost $45,500 - $41,300. So you total profit from the 450 call be assigned and the 310 being exercised is $4200. Meaning that for this to work you must sell a call that will sell for more that the cost of the call you buy plus its premium. So lets say you sold a 400 call and get a $5.00 credit that will net you $40,500 when you are assigned meaning you take a loss of $800 dollars.
When stock goes our direction and we make $$$, we are all happy. But how about the other way, say SPY drops from $395 to $320? How and when do we exit to cut at least some losses?
There's no risk-free strategy with good ROI, but You would have fewer losses because of the premium than if you had just held the share. If the S&P fell 70 points, you would also have good opportunities because of the increased IV.
You can roll it at any time to offset risk
The risk for the synthetic covered call is actually very simple.
You risk losing only the capital deployed to long the deep ITM leap call.
If the deep ITM leap call is worthless or depreciates in value, then the short call is also worthless (good for the seller, you).
If that call you sold becomes in the money. Don't you have to come up with the cash to provide those shares to the owner of that call?
how do the taxes work in the us?
Is this the same meaning as PMCC
turbo charged gains, huh? I wonder if the losses are turbo charged as well. Notice that they do not give you an entry or exit strategy. Be careful of prop trading academies...
Yep totally agree. I look at it more as a way to get the same return on less cash outlay, as opposed to doubling my return. Because even though the outlay was 1/4 of buying the stock, when the underlying goes against you, you lose at the same rate as owning the stock. Long way of saying you are more leveraged, so be careful before you use this as a way to increase position size. But I still like the synthetic approach these days to get same exposure but leave 75% of the cash sitting in my brokerage account making 5% interest while I have the synthetic trade on.
What delta do you recommend for deep in the money calls? Also, if my account is now spent $10k on the DITM call, the brokerage will let you sell calls with no cash in your account?
Some brokerages will and some will not.
Just to point out, it’s known as LEAPS, not LEAP. Thank you for your analysis.
Imagaine using the same strategy but in Jan 2022. How much would be the looses? (From the 85 delta leap call)
a lot like holding the shares
Calls on order flow ↗
This might be a stupid question but if synthetic covered calls have so many benefits, why would anyone still do "normal" covered calls?
If the shares fall sharply your LEAP options will expire worthless. At least if you own the shares you still have something of value that can come back. Time is not on your side with LEAPS.
Thank you!@@1houracademy
What's the significance of 7.5% above the current price? I'm just curious how this figure was calculated.
Well the SP500 goes up on average of about 10% per year, they must also calculate the factor of volatility and come up with 7.5% per quarter.
@@xianxiong3440 Based on the last 30 years the average ist 9.25%.
If you look at the Delta at the time he is showing you the 7.5% you will see there is about a 25% chance for the price to get there. You don't want the price to get there so you have a 75% chance of success. He is just picking an amount that he is comfortable risking
It's a tailor made example.. I can't believe SMB is putting out such crap. Run the same trades in 2022 and watch the returns.
I guess last year your short calls would have been blasted through by the market, so what do you do? Roll up the LEAP to a higher strike at a profit, and eat the cost of rolling up the short call?
Don’t you need to own 100 shares to sell the call vs owning just the LEAP?
What happens when the stock closes above the strike price on the day of expiration? You didn’t cover that scenario
Only works if you're certain the stock will stay roughly the same. If you think it's due for a rise then you might be better off not doing the short part of the trade.
Why not just sell a put, instead of creating the deep-in-the-money synthetic then selling the short-term call against it?
Yup, I don't get it. Seems a lot of things are missing...
To reiterate some of the comments below, there is a massive omission in this video, You need to know what to do if SPY falls by 10% or more, which it can do in a 4 month span. You need to know how to manage the trade when it goes against you, before you enter the trade. You need to know when to get out of the trade before losses become painfully large. This video only covers the best case scenario, which is misleading.
Agree. I am not a trader but would like to learn how to execute option trades.
My first rule in anything is how to analyze the risk or how to understand the worst-case scenario.
Many presenters talk and rave about the "successful strategies" without delving into how and when to exit or at least this is what I seem to be getting.
They discovered leverage
Everyone is happy until the stock price closes above your short option strike price.
While this is very much correct in its example, had you don’t this in 2022 you would (probably) lost 50% of the account…. What is not covered is how this works in a down or even flat market. That 310 call will go to zero in a year…. Should cover the market analysis first.
This is called Diagonal and not covered call..
Being short a call makes the seller responsible for the dividend. So only use, low yielding tickers.
Not true. You have to be short the actual underlying stock or ETF to be responsible for the dividend. Unless your short call is in the money, or close enough to make early exercise financially beneficial to the long holder, holding the short call is not an issue.
As far as I’m aware, and I maybe missing something so please explain, but this concept of a “synthetic covered call“ is not making sense. How are you covered since you actually don’t own any stock? If the call you are selling were to be exercised, you would be obligated to buy 100 shares of SPY (since you don’t own the shares to complete the call transaction) for a substantial amount of money that you do not have… why aren’t any of the downside risks discussed in this strategy? For new traders, who are unaware of the risks, this seems like a recipe for life-changing disaster.
Is this also called a poor man’s covered call?
I would go ATM synthetic, sell the Put now you don't have the decay issue and you will even get a credit plus lower margin. What your doing in a bullish calender/vertical call spread, not a synthetic. I can teach you guys how to do options like a pro...
It’s a diagonal call spread; it’s not unusual to refer to diagonal spreads as synthetic covered calls/puts.
A calendar has same strikes and different expiration. a vertical call spread has same expiration but different strikes. Synthetic cover call (poor man covered call) with long call expires a year or more can be called a LEAP diagonal.
Honestly I still don't understand the reason why my trader (Caitlyn Natasha Hughes) charges me 20% of my profit after the end of my weekly trade. I've been negotiating with her for about 15 months, but she keeps taking a percentage from me, which is very sad. I wish I could get a better trader who won't charge me a dime.
you mean you have a professional trader who trade's for you and makes profit for you. and you pay her 20% and you take the remaining after every trade?
@@Mojility yes exactly 💯 at least she should consider the fact that I have been working with her for more than a year now
yes exactly 💯 at least she should consider the fact that I have been working with her for more than a year now
Then trade your money yourself and you get to keep all the profit (if you're any good that is, which I suspect you're not as you fund a trader).
20% is the standard rate. Usually they also charge an additional 2% on total principal. So, if she's not charging that, you kind of are getting a deal.
Why would anyone want to do iit in any different, other way?
He didnt cover what happens when the trade goes against you. Covered Calls are not good when you have to exercise the long position in order to meet the short being in the money.
Being called is an accepted outcome going into the trade
Big loss on exit, not covered in this video
This is level 4 trading so most traders can't do this trade.
Video so Vague
Now, show what happens to your long LEAP when SPY shits the bed 😅
You just missing a “small” detail. What happens if the market goes down? Do your homework people….
When you’re investing you’re
Suppose to only risk what you’re willing to lose why does he have to disclose that in every video ?
Yes, you are right. I will avoid making comments in the future.
@@leocitro9943 avoid making this comment in the future noob 🤡 what are you a baby someone needs to hold ur hand thru this ?
You talk as if you know exactly how the market will play out, which is clearly not the case in real trading. This is very misleading to say the least.
SMB has a lot of good quality training material, but this is NOT IT.
You are infamous for IGNORING the risks of trading - and the strategies you present - SHAME ON YOU!