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Covered Calls for Beginners Explained - Proven Trading Strategies - YouTube
Channel: unknown
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Let's talk about covered calls.
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And I want to share my desktop
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here because what I want to cover
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is that I explain to you exactly
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what is it?
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Should you trade it?
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I will give you a very specific
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example, and we'll talk about
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can you do it in a retirement
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account? Now, covered calls are
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fascinating, and covered calls are
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usually the first option strategy
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that new traders start trading
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because it is super simple to
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understand and it is perfect
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for you if you already have stocks
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in your account.
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So let's talk about it.
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What is it?
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It complements the current
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stocks that you have
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in your account.
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And we are talking about long
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term stocks. We are not talking
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about trading, we're talking about
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stocks that you might hold for
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a longer time, like months
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or maybe even years.
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So let me give you an example.
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And the example that I want to give
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you here is for JP Morgan.
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So JP Morgan, as you can
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see during the pandemic got hammered
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when it came all the way down from
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$140 to only
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$80, and right now
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it's just trading shy of $100.
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Now, you might have JP Morgan
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in your portfolio, you might have
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had it in the portfolio before the
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pandemic. So let's just go to a
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monthly chart, because if you look
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at a monthly chart here of JP
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Morgan, you see that overall
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it is a good company, or maybe even
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you work for JP Morgan and
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got shares.
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It doesn't really matter, it applies
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to any stock, whether it is IBM,
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Boeing. So if you do have
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stocks in your portfolio, let
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me show you what to do, because
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right now, if you had
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JPM before the pandemic hit,
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you're underwater.
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I mean, right now on this one,
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you're losing money.
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Now, again, full transparency, I
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don't own JP Morgan.
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I don't hold any stocks long term,
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I trade between five
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and twenty-five days, that is my
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typical holding period.
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If you want to learn more about this
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there's probably a link in the
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description where you can learn
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about my specific trading style.
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But this is where we are at.
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So let's say that you've got it at
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$120, and $130, right now
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it is trading at $96.
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You still have this stock in the
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portfolio and you hope that
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eventually, it'll go back up you're
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not willing to sell it just yet.
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So let me show you exactly
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what you can do with this.
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Let's just say, for the sake of
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simplicity, that you would buy it
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today, that you would buy it at,
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let's say, $96.
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Now, the capital requirement
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for this is, if you would buy it
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right now, would be 100
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times $96 per
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share. So we're talking about
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$9,600, close to $10,000.
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Now when you have a stock, it is
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very easy to understand how a stock
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moves. If the stock moves up
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by $10 to,
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let's say, $106
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you make 100 shares
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that you have, times $10,
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so this means that you're making
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$1,000. Now, if the stock goes
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up by $20, let's say the
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stock goes up to $116,
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you would make $100,
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times $20 because
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you bought it for $96,
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right? And you're selling it, or
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the stock is right now at $116.
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So you would make
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$2,000.
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And if the stock goes down, let's
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say the stock goes down from $96
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to $86, super easy to understand,
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right? It is 100 times
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$10, so you would lose
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$1,000.
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So how does it work?
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You're selling one call
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for each 100 shares
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that you have in your portfolio.
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And here's what you do, when you
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sell the call you choose
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a short term expiration.
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And here in this particular example,
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we will use a 7-day expiration.
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So we will choose a call that
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expires in 7
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days from now. And we are choosing
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a so-called "out of the money"
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call at a strike
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higher than the current price.
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Is this making sense thus far?
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So let me show you what strike
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might make sense, and then we're
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gonna pretend to put the trade on.
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So if you look at JP Morgan right
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now and you say, "OK, I
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want to see, I will
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sell a call that
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expires on,
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let's say, July 17th." So
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right here in a few days, in 7 days
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from now, that's 5 trading days.
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So what do you think?
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How high could JP Morgan
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go over the next few days?
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Let's just say that you think it
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will not go higher than
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107.50.
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So we can choose this, and
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we'll take an option chain right now
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and we'll see if this strike price
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actually makes sense.
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But if you look at J.P.
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Morgan, you see this would be quite
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a significant move for JP Morgan.
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It means that it would have to go up
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almost 10%, now a little bit
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over 10%.
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Is this likely over the next few
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days? Probably not very likely.
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So let's actually go to
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a trading platform.
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I'm gonna log in right now and I'll
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show you exactly what this
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trade would look like and
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why it might make sense for you to
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put on this trade because there are
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some very specific examples.
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So there we go, there we have JP
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Morgan. And at first I want to
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say, "Okay, what happens
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if we put on a trade
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and if right now we put on 100
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stocks?" So here, as long
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as JP Morgan goes up, we are making
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money. If JP Morgan
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is going down, we are losing
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money. Super easy to understand.
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Now we add to this
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a covered call or a call.
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So we are selling a call
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right here with an expiration
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of July 17th.
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So as you can see, this is
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in 7 days from now.
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So a short term expiration here, and
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we'll pick a strike price where we
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say it is not very likely
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that over the next 7
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days, which is 5 trading days,
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JP Morgan will go above it.
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And I believe this is where we said
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a $107.50, let's do
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$107 right here.
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So this is where we would sell
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a call. And as you can see right
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now, we would receive $0.55
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for it. So this means if here
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we buy the 100 shares
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for $96, or let's
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say we still own them, right?
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And at the same time, we would sell
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the 107 call that
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expires 7/17,
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so in 7 days for now.
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The capital requirements for this
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are exactly the same.
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So the broker will not ask you
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for additional capital requirements
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when you're selling a call against
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stocks that you're owning.
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So here, it is still
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$9,600. Now, here's the deal.
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You are receiving right now $55
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if you are selling this call because
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options are being traded in 100
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packs. By the way, if you aren't
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familiar with options and you would
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like to have an Options
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101 course, I got you covered.
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In fact, that is for free.
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If you go to rockwelltrading.com/101,
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I'll send you an Options 101 course,
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there's 12 lessons completely free
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just enter your email and your first
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name so that I can address you by
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name and this way you
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would get this course that explains
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you more of what all options are
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about. So if the stock goes up to
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$100, you would make the
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$1,000 that you make on the stock,
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plus you make an additional $55
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that you receive as a premium by
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selling one of the calls.
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Now you might say, "$55?
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That doesn't make sense." Well,
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bear with me for a second because
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you'll see why this might
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make sense for you.
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So as you can see, you're increasing
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your profits by $55.
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Again, not a whole lot.
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Admit it, but wait for it.
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It'll get really, really good.
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So the same is true if
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the stock goes up to $116.
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So in this case you would make
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$2,000 plus $55
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so you would make $2,055.
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Now lastly, of course, if the stock
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is going down, you lose $1,000,
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but you're keeping the premium,
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the $55 so therefore
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your loss gets reduced
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to $945.
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So it is still a loss, but
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as you can see, the loss is smaller
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than here. Now, again, the question
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is, why would you worry
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about $55?
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Well, let's continue our math.
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So what you're doing here is
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you make $55
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in seven days.
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So this means if we take the $55
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divided by 7 days, that
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you make approximately $8 per
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day. So based
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on the initial capital, so
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if you take the 8 and divide
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it by $9,600
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that you had to invest in order to
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buy the stocks it is not
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a whole lot, approximately
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0.08% per day.
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Now, you might say, "What the heck?
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That's nothing." If you take this
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0.08 times 360,
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you would make an additional
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30%.
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Now, you might be wondering, "Why do
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I do it?" Now, this is in addition,
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whatever you make on this
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stock that is going up.
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So what do you think?
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Does this sound a little bit more
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exciting if you make an additional
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30% per year?
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The $55, that's not
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the deal. The $8 a day, it's
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not a big deal.
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And there are possibilities
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where you can make more money, where
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you can make $10 a day,
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$12, $15, sometimes
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with the right stocks you can
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even make $20
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a day or more.
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So this then means that you're
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making not only 30% additional
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per year, but you would make 40%,
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50%, maybe even 60%.
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Should you trade it?
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Absolutely if
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you're holding stocks in the long
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run, because it is almost
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like free money.
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Now, one of the things, very
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important that you need to
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understand when selecting the
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strike price, and you see we
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selected here a strike price of
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107, if at expiration
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if the stock is higher
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than the strike price that you
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selected, you have to
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sell the stock at this
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price. If it goes up to 107,
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you have to sell
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your shares for
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$107. So you would only make
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$1,100 plus $55. So this is
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the one danger of trading
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a covered call because
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you might lose the shares.
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But here's the deal.
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What can you do the next day?
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The next day, you can buy the shares
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again, especially these days
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where stocks are super
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inexpensive.
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So I wouldn't be too concerned about
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getting called away because you can
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buy them back the next
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day. If you like this
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idea of covered calls I decided
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to do a class on covered calls
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to show you exactly of how
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to do this. Not quite sure yet
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although, to be honest, if I will do
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it. But you can register
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at rockwelltrading.com/blueprint.
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This is only a waitlist.
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You can register on this waitlist
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and if I see that there's enough
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interest, I'll do the class.
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Now the class will be super
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inexpensive, it's very
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affordable.
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It'll probably not even cost $200,
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haven't decided yet.
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So just let me know if you're
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interested if so, put your
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name on the list here, and then
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if there's enough interest I will
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announce the date and also the
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investment for this class here.
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And I'll explain in detail what
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covered calls are, what strike
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price you should select, for which
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stocks that make sense, and we'll
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also talk about the poor man's
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covered call that we covered
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in the previous video.
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So just to wrap it up here, first of
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all, what is it?
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What is a covered call?
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Well, it compliments the current
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stocks that you have in your
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account.
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You would sell one call
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for each 100 shares that you have in
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your portfolio.
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You choose a short term expiration
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of 7 to 14 days.
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Choose an out of the money call at a
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strike higher than the current
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strike price.
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Should you trade it?
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Absolutely.
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Here's a specific example, and now
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the key question is, can you
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do it in a retirement account?
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And the answer is yes
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if you can trade options.
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And in order to trade options, you
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have to tell your broker that you
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want to trade options.
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So, yes, it is possible to do it in
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the retirement account.
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Talk to your broker because your
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broker might ask you, "OK, what
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exactly do you want to do?" And he
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has to give you special permission.
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Anyhow, hope that this video helps
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and if you found this helpful do
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me a favor and click on like, and
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maybe you want to subscribe to this
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channel. Click on Subscribe, hit the
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little notification bell this way
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you get notified whenever I release
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a new video. And there's probably
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a few videos right now, hopefully
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popping up on the screen.
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So click on any that sound
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interesting to you and I'll see you
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in the next video.
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