Avoid this Covered Call Mistake (Guaranteed Loss)
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There's one covered call management mistake to avoid that will guarantee a loss on your position.
The covered call is a popular options strategy that is easy to manage in most cases. If the stock is below the short call strike at expiration, the trader can buy back the call for a profit and sell a new call in a further expiration cycle to collect more premium and keep the CC going.
I'll break it down in this video, and talk about the "stock repair strategy" which can be better than a traditional CC on a losing stock position.
Leave me a comment if you have any questions or feedback!
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I'm in this exact position. I sold an underwater call as I realise there's almost no chance of the shares reaching the short call price. So far so good.
"Guaranteed" is kind of dramatic, no? You can still sell calls at a strike under your purchase price and win, you just have to factor in the extra downside risk from being forced to play under your breakeven price. If you bought something at $100, the price tanks to $80 but establishes a solid trading range with stiff resistance, you can still play calls above that resistance level and win a reasonable % of the time. You just might have to play it safer than normal with the strike price and accept much lower premiums to minimize the chance of getting the underlying shares called away for a loss. It's also worth considering that if someone has managed to earn $20/share worth of premiums already on the position, it could arguably be said the trader could continue to play aggressive, ATM calls to maximize premiums while relying on the previously collected premiums to effectively allow them to breakeven if the shares do get called away at an $80 strike.
Good to see ya again , allways great content !
This is very informative. Great vid
1:28 there's one other thing that you can do: To "rollover" the short call for a minimum loss by covering it and at the same time selling a new one at a higher strike and expiration. Have you thought about that .
Love to see you back my brother! I always want to see your videos! Great content! Thank you again!
Thanks bro! I am back!
That is so wrong... Sell options below the strike price is perfect OK, because you can always roll it up and out. Even McMillan (who wrote the book on options says so...)
Me, personally bag-holding some stocks, and I use this strategy. If my average cost per share is 15 and the underlying is trading at $8, I'll sell OTM CCs, and then roll it Out and Up.
Been doing this now for 10+ years...
exactly, it just requires more attention.
Thank you for posting again!... but I think you need to mention rolling a position. A trader won't realize a lose until they're assigned when your shares are below their cost basis. This is why it's recommended you roll a position. There's no change in buying power a trader can continually roll a CC until they're profitable. Once a traders shares are profitable, and a trader is comfortable with their gains, a trader can get assigned on their rolled CC. Because the trader is happy with their stock gains, the CC DIDN'T limit gains, and no additional buying power was used for this insurance :)
What are the tax implications if I keep rolling?
Is it worth rolling up and out if I don't want to sell my stock? I am worried about taxes each time I roll a call.
@@spothineni your broker will handle that, just get your statement
Let the good times roll! (Up & Out)
Chris,
Another helpful video
If one was to just sell premium for income and not care if shares get called away, the worst case scenario would be as you describe at 5:00 - agreeing to sell you stock below your purchase price.
So is there any problem with continuously rolling a declining stock at the break even price strike until price stops declining? Seems like a can’t lose strategy to me…with the only possible “gotcha” being if the stock has a very sharp decline past the break even point before you get a chance to roll.
Nice one. Thanks
Thanks-can you make a video about what to do when down on calls? I am way down on calls for FSLY and trying to figure out how to recoup before Jan 2023 expiration.
great content thanks
Hi Chris, just happened to come across your you tube video while watching it I dint forget to click like and subscribe , thank you very much for the time and effort making this good video. By the way, I'm new on this option trading and thought I'd give it a try on the CC and it looked like i might have to end up getting assigned. Trying buy to close but don't have enough buying power, is there way to go around it ? Could you help me by answering this question and this might be a stupid question ; you showed how to buy back a call to close an option assuming there'll be a loss so that you wont have to risk being assigned / sell your shares but I din't hear you mention what source of fund to buy it with . The question is ; do you have to have fund on hand meaning buying power in order to make the buy back purchase or cant you use the same collateral as being used in the CCO? Hope you can understand my English ok , any advises/recommendations would greatly be appreciated. Thank you
Excellent video
With relatively high IV, we can probably sell covered calls with strikes below our share purchase price as long as premiums from selling ITM coverd calls take us to breakeven point overall.
with covered calls your upside is limited while your downside is all the way to zero. it might be something to do with stocks you are holding for the long term yet estimate are going nowhere in the short term. but i would never buy a stock just to write calls, unless you are absolutely confident that stock is going to drift sideways
Awesome vid man.
I always listen to your advices and thanks for the information that you give us, I have learned alot from your useful videos.
by the way when you talk in a friendly way and smile , you look so gooooood.
.
Discontinue? No, sell a put and DCA if you get caught. IF IF IF the company is worth owning. If it's not, why did you buy 100 shares of it in the first place? If you don't want to own the company just trade the options on it. If you're running a wheel strategy, run it on the idex ETFs. My $.02.
Excellent news 👏
You can sell covered calls "underwater" it just depends on your situation. Selling ITM calls will effectively lower your basis. You can buy AAPL today for $176.65 you call sell a DEC 15 call at 175 for 6.10. That puts your adj basis at $170.15. That means you have 2.8% return in roughly a month (~30% annual return) more or less "locked in" and the stock can go down ~3.67% before you take an effective loss. Selling calls ITM or ATM will give you some downside protection though give you less upside, but if you are fine with the limited upside this may work well for a lot of people
great video, can you tell me what video editing software you used?
Hi Sir! I am confused as to how can one buy back an in the money call for a lower price/premium? ($400 vs $600)? Also are we talking here about European Calls?
Wahoo! 400K subs! Way to go, Chris! Great video again. I'll have to try one of these "ratio spreads" lol. Also, hope you got my email with all my feedback.
Thanks Evan! I appreciate the support and yes I got your email I will be responding soon!
Finally a new options video!
many more to come! going full options for the next few months at least
Thats a ZEBRA combined with a one lot. Big bro Mike love this one.
Thanks for another great video. Covered Calls have worked great for me. Been rolling some of my Covered Calls down and out recently. The market values before the bear market were a bit crazy. Some of the stocks will not reach those highs again for quite a while. I have owned some of these for two decades and my cost basis is crazy low. Keep them coming!
Same with me. I bought Baba, Coin, Zoom at crazy high prices during the pandemic and didn’t sell on time. Now I’m stuck. So under water covered call rolling strategy is so far working for me too.
@@ayeshash2001 Would you explain what is under water "under water covered call rolling strategy"
This really comes down to goal; do you want to maximize premiums? Or do you want to sell the stock a profit and give up premiums if the share price falls? I was the former and would simply hold cash and get paid with cash secured put. I think it is easy to show that for blue chip stock or ETFs more premiums will give you greater return over time. For those who hold shares that are more volatile, which I think is a bad strategy for covered calls to begin with, then maybe a stock takes off and is so out of range that even cash secured puts make no sense. But in general more premiums over time (from calls and puts) will be much larger than any delayed covered calls that take time to expire. It is a good video and fine for very conservative investing approaches. However, due to volatility in stocks and markets, this doesn't really allow for capitalizing on income from premiums under all market conditions.
Most people would rather bag hold than just realize the loss and put the capital to work somewhere else. I think it's a psychological thing, you never realized the cost so it didn't happen. What they fail to realize is the opportunity cost they pay.
@@travismartinson1813 How did you guess so well my condition
@@abuyusuf8374 because I've been there myself.
Way too simplistic for the markets. Always short calls to recover from a losing position with the delta you are comfortable with. If your short call is ITM do a strangle- assumption is you bought the stock at a higher price and are willing to buy more at steep discount worst case or take a chunky premium on both sides in the best case.
There is something wrong with stock repair strategy. Why buy bull call spread instead of credit spreads?
look who's back
In that situation, it's better to just let the shares go. Either move onto another equity or wait and buy back the stock at a lower price.
Reduce risk in a down market by selling in the money covered calls. This reduces upside gains but reduces downside losses.
Your back!!! Yes
Spammers people
So you can find the highest yield cc on the market, put in a Limit order to buy the call back when it gets to BE, and then sell the underlying...
Where's the risk now? Just slippage and the sale price - the purchase price for the option?
That's a pretty low risk strategy right? What am I missing?
Trade management is a very specific to your position and the purpose for your initial trade. The trade itself is never guaranteed loss as you will get something out of your trade (potential profit, protection, etc.). You made the trade in the position you made it for a particular reason. You can use it for cashflow, use it as a hedge, or use it for some other purpose you may have for the initial trade. Stick to your plan and understand what the next couple steps are prior to entering any position. Creativity, capital management, and understanding your trade is paramount.
So what is the ideal outcome we are hoping for in the repair strategy? The stock price is between 100-105 at expiry?
To go to the short call strike just like a standard CC. that way the call spread has max value while the extra short call goes out worthless
Cool, so what if the stock's price itself goes down?
In this recent market some of my positions have tracked down significantly. I have been selling CC with a strike above my basis but definitely not above my purchase cost. It’s the basis, not the purchase cost that matters.
May you explain ?
@@jg109426 The basis cost is the effective price you have paid less all of the money you have made from holding that position - either from dividends or previous covered calls. Hence if you paid $1000 for 10 shares at $100/share, but have made $100 in dividends and $100 in covered calls, the basis cost would be $800 or a basis price of $80/share. Hence you can still sell the position for an overall profit provided you receive more than $800 for it.
If say, the situation arises which forces us to sell underwater calls then will it make sense to sell calls which have more time-value, maybe a call which expires in 3-4 months instead of the next month or so?
That’s a good point since you can collect more for it. Depends though. If your purchase price is super far OTM it might not collect much premium even if you go 3-6 months out. It really depends on the specific situation! There are always exceptions to the things I explain in the video which you’ve pointed out.
Hi Chris, I am a bit confused with the stock repair strategy. Is this to be used if the stock you have covered call on declines because your bull call spread would also lose money if you are placing that trade simultaneously.
It is meant to enter after a decline in the stock. The stock repair is not necessarily meant to be entered after a covered call position has declined, just 100 shares.
So if you buy 100 shares of stock with NO covered call and the stock price declines notably, you could buy a call spread and short an additional call at the short strike, ideally creating a zero-cost bull call spread + CC combo (meaning the extra short call covers the entire cost of the call spread).
Sir, i learned how to trade options from watching all your tutorials starting from the first one. You speak clear and concise. Your videos are just very well put together. You deserve more views and definitely an endorsement of some sort. Thank you for all your time and dedication in helping us learn - means a lot.
Thank you! It’s probably because I don’t post more but there are many videos on the way 😀
You can continue selling calls if the stock keeps falling. If the price goes above your strike price, you can roll out and up until you reach your entry price. The only problem is if the stock rallies, that you could extend a lot your option dte
You are right, "rollover" works (futures traders do it very often). But this guy never talks about it.
Agreed. If the stock rallies, one could sell a Put to help recover some cash until the stock starts moving sideways.
even if it rallies as long as you actively manage it it's no big deal
Selling underwater calls will recap part of the declining share price in the meantime.
Right? I see this as a good thing as I’m taking advantage of a bear market while continuing to hold with conviction for the long term.
Agree, I do this also.
better to buy a put spread. That's the proper hedge if you intend on keeping the stock position open
you have a collared position now
What about switching to selling OTM puts when you can't sell "overwater" calls?
You could, but you're still long the stock, so selling an OTM put with the intention of buying more stock requires the addition of more money to the position
If the stock goes down a large amount, instead of waiting for it to recover past or at your initial buying price can you instead buy more shares of the stock and lower your total average? Then resuming CC?
That will depend upon amount of capital you have/// what if the fall is so big that to to dollar coast averaging will require huge amount of capital? and then again what if the stock keeps going down and down
This strategy is probably better during Bull markets. It would likely get decimated in the current Bear environment.
Can this strategy be employed using a PMCC instead of owning 100 shares of the stock? BTW, Chris, I am so happy that you are, again, making these training videos.
Thanks Bob! I'm happy to be making videos again as well!
The same concept applies to PMCCs as well. It's a little different since there are two expirations, but generally, if the short call is rolled to a strike below the long call strike + net debit, that creates a losing situation.
Hi, suppose that you have the shares of the stock you want to use to setup a covered call. How do you use your existing shares instead of buying shares needed for the covered call?
You just short a call in the options you own shares of. If you own 100 shares of AAPL you go into any AAPL options and short 1x call.
@@projectfinance Thank you.
Please correct me if I'm wrong, but I don't think a short call is necessarily "underwater" if its strike is lower than the original purchase price of the underlying stock. As you mentioned in the first part of this video, P/L from other short calls will effectively change the original purchase price (tracked as the adjusted cost basis). Therefore, a short call is only underwater if its strike is below the adjusted cost basis of the underlying stock (regardless of the original purchase price), right?
Yes that’s technically true. If you bought a stock for $100 and you’ve profited $20 from previous covered calls then you could think of your share cost as $80 and sell calls below $100. That’s a lot of premium to collect though which would take a while of successful trades to obtain.
@@projectfinance does his example also also work using poor man cover calls? And if they do, how can I calculate that “adjusted cost basis” if I have decided to leave the long leg open?
@@robertoortiz8655 You'd take the short call premium and subtract it from the long call leg to get the "cost basis" and then add that to the long strike.
So if you bought the $250 call for $25 and shorted the 300 call for $5, the cost basis of the spread is $20, and the breakeven is around $270. You wouldn't want to short any call strikes lower than 270 unless you collect more premium from more profitable short calls that further reduce your cost.
@@projectfinance tastyworks don’t have a way to track this automatic?
@@robertoortiz8655 I don’t think any platform does because it doesn’t know that you want all your separate short call trades and singular long call trades should go together
Specially the part where you say that we can potentially get a credit by selling a higher strike call
If you have a 100-strike call that's trading for $5 and the 105 strike calls are trading for $2.60:
Buy 1x 100 call for $500
Short 2x 105 calls for $520
You would receive a $20 credit for entering those options.
Why is it called Stock Repair Strategy. I don’t get it.
he didn’t explain that clearly or when to use the repair strategy.. you only use it if you bought shares lets say at $100 and stock goes down to $80.. now you can do the stock repair.. instead of waiting for the price to go back to $100, you enter the repair strategy and be even when stock price goes up to $90..
@@onatski Well, but you pay for long calls and that money is gone in case the stock goes sideways.
Why not buy another 100 shares at 80 so your cost basis drops to 90 and begin selling covered calls again that are at 90 to collect the higher premium and exit the trade?
That's a viable strategy for sure, and good logic behind it. Especially true if it's a market index like SPY/QQQ, though those ETFs are expensive (it would be cool if they split).
That’s the strategy? Don’t sell covered calls below your basis?
i have a question. what if the stock goes down and i make money with premium and i decided to sell again but this time is goes up but doesnt reach to the point where my share makes profit yet but i am guessing my option looses money. does this ends with negative ? like increases my cost basis
If the stock goes down you’ll have a profit on the short call and you can buy back the short call for a profit. You could short a new call at a different strike and in a different expiration. If the stock shoots up though the short call will increase in value. But if the stock is at or below the strike at expiration you’ll be able to buy it back for a near full profit. If the stock goes way higher than the strike then you’ll have to buy back the call for a loss to keep your shares.
@@projectfinance thank you so much for your time to respond. this is my fear about covered call. May be you can make a video about with examples. that would be nice. Thank you so much again for the great contents
I'm eager to trade options but to purchase a 100 shares of a particular stock just to enter a postion is pricey (depending on the stock of course), I guess that's why I trade futures.
PMCC
I am from India I watch your videos regularly
Thank you! I just spent a ton of time creating an Options Trading for Beginners PDF (170+ pages now) that includes my best explanations/visuals explaining key options trading concepts and strategies. Check it out: www.dropbox.com/scl/fi/g7d402wnapqexq344ct73/options-trading-for-beginners-aug15-v1.pdf?rlkey=dort61xyaz1rubndbwbqmhd5i&dl=0
If you want updates to the PDF over the coming months/additional learning resources, consider dropping your email on the page here: geni.us/options-trading-pdf
🎉SUBSCRIBED 🎉GREAT JOB😊👊
Thank you! I just spent a ton of time creating an Options Trading for Beginners PDF (170+ pages now) that includes my best explanations/visuals explaining key options trading concepts and strategies. Check it out: www.dropbox.com/scl/fi/g7d402wnapqexq344ct73/options-trading-for-beginners-aug15-v1.pdf?rlkey=dort61xyaz1rubndbwbqmhd5i&dl=0
If you want updates to the PDF over the coming months/additional learning resources, consider dropping your email on the page here: geni.us/options-trading-pdf
I bought O stock a 47 dollars there’s a sell call option for 32.50 for a premium of 1358 dollars that expires on Nov 17 2023 today is Oct 30th if the price doesn’t hit 32.50 I’ll get to keep the 1358 correct ? I know if it does hit 32.50 I could be forced to sell at 32:50 but with the 1358 I collected will cover the loss on the shares minus 92 bucks. Meaning I’ll only lose 92 bucks. I don’t think the stock will ever get that low can you help me
I wouldn't sell a deep in-the-money call like that.
The premium you're collecting there mostly accounts for you selling the shares at 32.50 with the stock at 46.21. You have to sell your shares if assigned on a short call when the stock price is at any price above the strike. So if you sell the 32.50 call, you will have to sell the shares/limit your upside gains on the stock at any price above 32.50, not only if it touches 32.50.
I see ! So if I do get assigned for 32.50 I’ll be losing 1450 on the stock price but the 1358 I collected means I only lost 92 bucks correct ?
I’m going to close the contract in the morning i sold it for 1358 and i can buy it back at 1250 because the price went down I’ll profit the 100 bucks once i close it out
To protect yourself from a falling stock after selling a covered call can’t you just purchase a put option with a lower strike which will cost you less premium resulting in a credit of premium collected.
Sure. Those are called spreads.
If you actively manage a underwater option position you can easily roll out of it over time with out lossing your shares and still making profit.
Is rolling free of charge?
Your videos are usually great and you explain well. But the last part of this video where you talk about stock repair strategy is unclear and confusing as to why it is required. Can you please detail that out or make another video on that please! Thank you!
Yes it deserves its own video! I'll do one.
@@projectfinance It will be nice to see that new video
If I own 100 shares of stock and it’s declining can I still sell calls against it and also buy a put?
You can short calls and buy a put against stocks. That's called a 'collar' position.
Check out this video I made on this: th-cam.com/video/JybPrdrAfn4/w-d-xo.html
@@projectfinance thank you, I just did a test on Robinhood to try and see what a zero cost collar would look like. For the profit and loss diagram it shows unlimited loss. Is it showing that because if my sell call option hits the strike price I will then get assigned and have to sell my shares at that price?
@@sonogirl12345 You need to own 100 shares of stock for each call you short. If you own 100 shares and set that up in RH and it is saying unlimited loss, it may not be factoring in your stock position.
Saved my life. I was underwater.
I dont get the point. If you do a video on this topic please at least go into detail about it. The ITM Call‘s intrinsic value makes up for selling the shares at 95. you would get 5$ + extrensic value so if it‘s not for tax reasons I don‘t understand your point. Sorry I‘m not that good in english, I hope you understand my point
If anyone knows I would really appreciate an answer
In the video, he buys 100 shares at $100 per share. Then the stock price falls to $80 per share.
To earn a little premium, he sells an OTM covered call with a strike price of $95. He is gambling that the share price will not go back above the $95 strike price at expiration.
You misunderstood what he was presenting when you said it was an ITM call at the $95 strike price. He presented the scenario of a falling stock price to $80, when he sold the OTM $95 covered call. When OTM, there is no intrinsic value.
Hope this helps you understand.
Yes, this! Thanks for clarifying the scenario.
I understand, thank you guys for clearing this up👍🏼☺️
Where U been brother? Lol
Working on another project. I'll be uploading again regularly going forward as I got a video editor to help make content creation easier!
@@projectfinance Great to know looking for it!
Couldn't understand the stock repair strategy
I will do a completely separate video on the stock repair strategy
@@projectfinance Thanks for your reply. That will be great. Just getting greedy here: I typically buy stocks in future (Indian Stock exchange: NSE) and sell an ATM or OTM call. If the stock price goes up, it's all great. But in case the underlying stock price falls rapidly, the trade becomes tricky to manage. Please suggest possible remedies. Thanks again
Couldn't you just roll up if tested.
Technically, yes. But it's entirely situational. Depends on how much time has passed since opening the trade (how much time decay has occurred) and how much the stock has risen. It can be very hard to roll up for a credit unless you roll waaay out in time.
@@projectfinance very true no point in rolling out far in the future for a couple of pennies.
Your explanation when the price goes down on a stock and you have a open sell covered call option is very misleading. I lost a bit of my premium. Next time show examples for what you are talking about. You need to explain what happens to the premium when you buy to close options. 👎
Come man use real option prices not your imaginary prices oh but you are selling arnt you
tried to set up a tastyworks . It actively hates me. Fought me on depositing, wont give me an options account.. horrible customer service.