Covered Call For Beginners | Coffee With Markus Episode 64

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In this Coffee With Markus, I consider the pros and cons of Covered Calls for beginners!

Intro: 0:00
What’s Happening In The Markets: 2:06
Covered Calls For Beginners: 8:19
Deep Dive Q&A: 26:37

The Covered Call Strategy is one of the first strategies that new traders start trading. Traders might use a Covered Calls on stocks that they have in their portfolio for longer periods of time.

For the specific example that we’re going to cover today, we’ll take a look at JP Morgan (JPM). If you were holding JPM stock in your portfolio before the pandemic, chances are that you are underwater.

For the purpose of full transparency, I do not own or hold any JPM stocks. I typically only hold stocks between 5 and 25 days.

If you’d like to learn more about my specific trading strategy, check it out here (LINK HERE)

For this example, we’re going to assume that I own 100 shares of JPM. If I purchased these shares for $96 it would mean that my capital requirement is $9600.

You’re probably familiar with the way profits move in relation to stock prices… but.

If the stock increased to $106, or $10, I would earn $1000.
If the stock decreased to $86, or -$10, I would lose $-1000.

How Does A Covered Call Work?
This strategy complements currents stocks you have in your account.
You would sell 1 call contract for every 100 shares of that specific stock you have in your portfolio. The contract that you sell would ideally have a short expiration date of 7 days.
You would choose an “out of the money” call at a higher strike than the current price of the stock. When choosing this strike price, you would typically choose a price at least one standard deviation away from the current strike price. In other words, choosing a strike price that you do not believe the current strike price will exceed.

If you’d like to learn more about this options strategy, or options in general, I have an awesome options101 course for you her.

What’s the benefit of having a Covered Call for the stocks in my portfolio?
When you sell the call option contract, you will receive a premium. In this example, I received a premium of $55 for selling a call option contract at the price of $116

Let’s take a look at how a covered call will affect your portfolio with the same stock movements.

If the stock increased to $106, or $10, I would earn $1000 plus the $55
If the stock decreased to $86, or -$10, I would lose $-1000 plus $55 or $945

Why does this work? If you take the entire amount of premium you received and divide it by the length of time between now and the expiration date of the call contract you come up with this: $55 dollars in 7 = $8(ish) per day.

This covered call contract is paying us 8 dollars per day.

If you take the $8 dollars, divide that by your total capital investment of $9,600 it equals 0.08%.

This may not sound a lot, but if you multiply that by 360 days out of the year, you end up with a return of over 30% ON TOP of what you earned from the growth of the stock.

Should you trade it? ABSOLUTELY

BUT…. There is a risk associated with this strategy.

If the price of the stock rises above the strike price you selected for your call option contract, you have to sell your stock at this price.

So if the price of the stock went up to $117 and the options contract expires, you have to sell your own stock at $117. This means you would only earn $1,100 + $55, or $1,155.

In other words, you would lose $100 for every $1 the strike priced moved above your call option contract.

But, you can probably buy your stock back the next day if you wanted to recover them.

If you’d like to learn more about my Covered Calls Class, you can learn more here!
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Comments

Tsengtan Shuy says:

$4950 for PWX is too expensive. Do you have a monthly subscription for the product?

mike rybin says:

How do I subscribe

Alen Bullish says:

How do you close the order? and what happens if you sell it the next day instead of waiting for the stock to expire?

Jeff says:

Covered call is a relatively simple and safe options strategy. More advanced version would be the "wheel". One can make good returns if patient and vigilant. I have dabbled with it. However, please do not be seduced into the other so-called "safe" strategies, such as strangles, straddles, iron condor and other credit spreads. I lost my shirt by overplaying them. Constant vigilance and adjustments are needed and very stressful.

Peter Cooper says:

No disrespect Markus, but if you are not doing this covered call strategy yourself, would you be the best person to teach this strategy?

PS: I have put my name down on the blueprint to register my interest.

Mr. Tibbs says:

That math isn't right.

Alex Zagar says:

Hi Markus, Thanks a lot for a very clear videos. I Like them a lot ! Can you please make a video about TTS Square indicator. Sounds as it is a very important indicator in trading, but I have a problems to find a good website for it so it can be used. People in UTIBE shared pictures, but no website. It will be REALLY IMPPORTANT AND GREAT INFORMATION, if you can, of course ! Thank you very much ! Alex

Don V. O. says:

Buy right. Is buying a stock and selling cc at the same time

apfelsnutz says:

Another EXCELLENT video…. the hits just keep coming ! LOL
Ron

Dennis Mirante says:

Do you need to do a sell to open on the covered call? Do you need a buy to close before expiration? If it hits strike price at expiration, does broker do an automatic sale or do you have to explicitly do it?

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