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Poor Man's Covered Call Explained - Proven Trading Strategies - YouTube
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Let's talk about poor man's
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covered call.
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What is it? Who is this
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for? And when to use
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it? And as always, I want to show
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you very specific
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examples.
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And the reason why I'm talking about
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covered calls today is
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because the poor man's covered call
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is a very specific type
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of spread.
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And as you know, we have been
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covering options spreads
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for the past few sessions.
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So we actually have a playlist
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right now that shows you
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everything that you need to know
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about options spreads.
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So here what you see is an option
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debit spread and this is from a
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video that I did earlier.
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So today I want to talk
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about a covered call and I want
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to show you exactly what is the
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difference between
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trading stocks, trading
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a covered call and trading
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a poor man's covered call, and what
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is a poor man's covered call.
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So let's first talk about stocks
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and I want to use Boeing, BA
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as an example.
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So, as you can see, Boeing right now
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is trading at $180,
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dead smack.
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OK? So let's say
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that you are bullish
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on Boeing and that you expect that
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Boeing will go higher.
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Let's just say, right?
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So this is where many people start
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with trading stocks, and
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therefore when trading stocks, you
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would buy 100 stocks
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of Boeing and you would buy it
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right now at
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$180. So the capital requirements,
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if you are trying to trade
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100 shares of a
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stock, is here 100
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times $180, so
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this would be $18,000.
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If you don't have a margin account,
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so right now, I assume that you
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have, let's say, a retirement
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account or not a margin account, so
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you are buying 100 shares
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for $180 each, so that
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would be a capital requirement of
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$18,000. Now, let's see what
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happens if the stock goes
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up by a whopping $10.
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If this happens you would make
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$10 times 100 shares, so you
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would make $1,000.
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Making sense?
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So if the stock goes up from
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$180 to $200, you would make
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$2,000. Super easy to understand.
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Now, let's say what happens if the
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stock drops by $10?
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Well, what would happen is you lose
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$1,000.
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So super easy to understand, and
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this is what most people do when
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they start trading, they start
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trading stocks.
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And then as they are getting
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interested in options,
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the first strategy that most
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people do is
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trading covered call.
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Now, first of all, let me show you
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as we are going to Boeing here,
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let's just say we would buy
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100 stocks of Boeing, and
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let me just go to the analysis.
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See, super easy to understand,
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that's what we talked about.
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If you go from $180 to $190,
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we are making $1,000.
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Here we are making $2,000 and
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as the stock price goes down,
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we are losing money.
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This is what you see here on the
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screen. Now, if you
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look at the chart, you might
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say, "You know what? I think that
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Boeing will go up in the long run.
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But over the next few weeks, looking
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at the chart here, I don't think
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that Boeing will go
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above $200." Here's
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why this is important.
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For the covered call, you would now
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say, "OK, I buy
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100 stocks at $180, and
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at the same time, I am selling
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a 200 call."
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And here we would say,
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you know what? Today is July 8th,
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so let's say for the next 10 trading
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days so we would sell one that
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expires on July 24th.
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Now, let me show you exactly what
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happens when we do
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this.
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So I will here add
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another trade into this for
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July 24th, I will sell
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a 200 call.
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And you see, for the 200 call right
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now we are getting $4.50.
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So the capital requirements, when
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you do this, when you sell a call
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against stocks that you own,
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it is still the same.
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You don't have to bring more capital
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to the table. So it is still
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$18,000.
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So what happens if the
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stock goes up? Now, first of all,
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as we sell this
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200 call, we
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are receiving $4.50.
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Now options trade in 100 packs,
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so we are receiving
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$450. So if the stock
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goes up by $10,
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we are making the
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$1,000 that we would make with a
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single stock, but we also,
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in addition, we are making
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$450 the premium
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that we received for selling
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the call. When we sell a call, we
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receive a premium and that is what
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we get. So this means that we
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make a total of
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$1,450 and you already see the
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difference here.
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So by adding a covered call,
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if the stock goes up
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by $10, not
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only do we get the $1,000
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from the stock rising,
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but we also get the premium
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that we actually receive by selling
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the call. So we are increasing
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our gains by 45%.
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Now, the same here if it goes
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up to $200, we are
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receiving $2,000 plus
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the $450 so
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this means we make
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$2,450. So again, we are making
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more than we would make if we would
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only trade the stock.
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Now, here's the cool thing.
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And you know that we have been
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talking about debit spreads already,
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so why would you trade a debit
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spread? Why would you sell a
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call against stocks?
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Well, not only to increase
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your gains, as you can see here,
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but also to reduce
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possible losses, because if
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the stock, if Boeing goes down
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to $170, you would
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lose the $1,000,
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but you're getting the $450
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in premium.
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Therefore, you're only
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losing $550.
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So as you can see, it does
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make sense to trade a covered
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call. This is why many stock
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traders, the first thing they do
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when trading options is
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selling a covered call because
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you're amplifying your gains
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and at the same time, you
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are reducing your losses.
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So is this making sense thus far?
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Because I want to show you what the
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poor man's covered call is, and
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I want to show you exactly of what
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are the advantages and disadvantages
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of having a poor man's covered call.
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But I want to make sure that this is
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helpful. If it is, do me a favor and
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click on like really quick or just
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say, "yes" in the comments so that I
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know that I'm not going too fast
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or too slow, that I'm actually going
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at the right speed.
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So why would you trade
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a poor man's covered call?
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When would you trade it?
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If you don't have $18,000
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in your account. Because you see,
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this is what is required
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when you're buying 100 shares of
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Boeing.
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And let's say that in your account,
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you only have
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$10,000. How does a poor man's
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covered call work?
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Instead of stocks,
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you can buy an option, and
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you would buy an option that is deep
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in the money at a later
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expiration.
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So not at the same expiration
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because in the long run, again, you
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think that the stock stays above the
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current price and moves slightly
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higher. So we sold the July 24th.
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The first thing I want to do here is
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get rid of the shares because
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instead of the stocks,
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we want to buy an in the money call.
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So that's what we are doing, we are
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going to the table.
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We are going out a month
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or two. So usually it's one to two
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months out, I choose a little bit
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less than two months out, so the
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September and I'm looking
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at the 110 call.
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Now again, right now Boeing is
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trading at around $180
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so why do I go for the
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110 call?
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We want to see a delta
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of
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0.95. Because what does it mean?
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A delta means that if the stock
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is moving a dollar, the option
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is moving $0.95.
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And you see the deeper in the money
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your call, the higher the delta.
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The delta is usually never one,
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and I like to have a delta
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of let's say 0.95.
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So here we don't have exactly
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0.95, so I go for 110
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call and this is what
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we want to buy.
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So we are buying the 110
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call. As you can see right now,
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it costs around
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$71.
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So let's talk about it.
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So the poor man's is we are still
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selling the 200 call,
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and now we are buying the 100
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call with an expiration
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of September 18th.
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Now what are the capital
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requirements?
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So we are no longer buying the
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shares, we're buying the call,
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and we are buying one call, which
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is basically for 100 shares,
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and we are buying this at
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$71 so this means our capital
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requirements are
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$7,100. As you can see, this
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is a fraction of the
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cost for buying a stock.
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We are still selling the 200
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call. But the main difference here
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is, instead of buying a stock
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we are buying a call.
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Now, let's see what happens if the
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stock goes up from
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$180 to $190.
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And this is where we are going to
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our risk graph and we see if it goes
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from $180 to $190
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right here, you see that now
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we would make
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$1,335. As you can see, this
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is slightly less than the
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$1,450 that we would make with a
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call. Why?
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Because again, the option has a
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delta of 0.95,
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so it only moves 95%
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of the stock. So if the stock moves
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$10,
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the option would only be worth $9.50
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more. Is this making sense?
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Okay, so let's see what happens
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if the stock goes up to $200,
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and we're going back to our risk
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graph here and we see if it goes
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up to $200, we make $2,320.
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You see it right here.
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So we will make
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$2,320. So, again, as you
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can see, not as much
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as we would make with a covered
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call, definitely more
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than we would make with a stock, but
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you need much less money.
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The cool thing is, with a poor man's
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covered call, you're almost
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making as much, you make
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95% of the money that you would make
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with a covered call, you would make
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more money than just having
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an outright stock, and
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you need to bring much less capital
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to the table.
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OK. Now let's talk about, of course,
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when the stock is moving against
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us. So when the stock is moving
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against us here and we say it goes
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down to $170,
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we would lose
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$675. So we are losing a little
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bit more than we would lose with a
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covered call, but
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not as much as we would lose
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if we would only trade the stock.
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So as you can see thus far, it
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sounds awesome. Why wouldn't you
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trade the poor man's covered call
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all the time?
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Why are people trading stocks?
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Well, that's what I want to show you
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right now, where the problem
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is so that you know that there
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is a downside to this.
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I mean, there's always a downside to
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it. So the problem starts
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if the stock goes up
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above the strike price
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that you're selling, because with
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the strike price that you're
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selling, you basically say,
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I am willing to sell the
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stocks at $200,
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right? So if you just
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have the stock and it goes up to
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$220, you would make
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$40 times 100,
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so you make $4,000.
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Nice! Right?
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I mean, this is assuming that Boeing
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jumps up to $220.
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What does it look like here?
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Well, again, you are capped
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because you bought the stock for
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$180, but you have to sell it
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at $200.
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So this is why on the stock
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if it moves up to
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$220, you only make
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$20.
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So $20 times 100 is
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$2,000 for the stock.
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Plus of course, the $450 this
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is the premium that you always
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get so as you can see, it
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would be $2,450.
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So you're capped here, meaning that
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you don't make as much as having
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the outright stock.
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Now with a poor man's covered call,
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this is very similar to a covered
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call so you are capped.
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Let's take a look at this.
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What is your cap here?
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It is $2,320.
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So let's go back here, and you see
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it is $2,320.
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This brings us back to we talked
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about it, what is a poor man's
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covered call?
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Instead of buying stocks, you would
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buy a deep in the money call at a
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later expiration.
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When should you trade it?
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If you don't have enough money in
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your account but you want to trade
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more expensive shares.
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And the important thing is, the idea
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is that the stock stays above the
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current strike price and moves
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slightly higher. Now, here's the
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deal, this cap that
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you put on the stock expires
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in 10 trading days from now, 7/24.
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Today is July 8th.
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So and again, we have two weekends
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in between.
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So this is why it expires
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in ten trading days.
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So as long as Boeing
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stays below $200,
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it definitely makes sense to
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trade the covered call.
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And do you actually lose money
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if Boeing would go above 200?
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Do you lose money?
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No.
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The only thing is that you wouldn't
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make as much money as
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if you had traded the outright
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stock. But overall, as you can see,
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the advantages of trading
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a covered call, or trading
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a poor man's covered call, if
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you're long term bullish on a stock,
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that's the important thing, if
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you're long term bullish on a stock,
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then the advantages of
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trading a covered call or a poor
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man's covered call
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outweigh the disadvantages
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then trading a stock.
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And before you trade a covered call,
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if you don't have any stocks in your
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portfolio, consider
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trading a poor man's covered call.
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Well, has this been helpful?
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I hope it has.
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If you enjoyed this video and would
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like to see more videos like this,
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consider subscribing to the channel
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and hit the little bell because this
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way you get notified whenever I
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release a new video.
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And now enjoy any of the videos
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that hopefully pop up on the screen
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right now and I'll see you in
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the next video.
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