How to Master the #1 Options Income Strategy

okay good afternoon and welcome back everyone to our options education webinar series my name is tony zhang i'm the chief strategist here at options play and today we're here to go back to the basics and talk about the number one income generating strategy utilizing options and i really want to talk about how to master this one strategy because it's really the foundation of learning how to trade options understanding options pricing and how they are affected by both time and the stock moving higher and lower so if you can master this one strategy it'll give you a huge leg up and being able to trade other types of strategies such as buying call options and other types of more advanced strategies so let's go ahead and get started and hopefully give you a clear sense for how to utilize the strategy and all the tips that i have for trading in now before we get started what we are going to discuss here today is purely for education and demonstration purposes it is not a solicitation or recommendation to buy or sell any of the specific securities that we are going to discuss during today's session so the number one options trading strategy on options income generating strategy is a cover call we're going to briefly go over what a cover call is for those of you that may not be familiar with it but most importantly i think the best way to learn is go through a real example and what you're going to find through this session is that hopefully there are plenty of opportunities for you to add income to your portfolio that you may be missing out on today because perhaps you're thinking about cover calls in a more boring fashion or perhaps you're thinking to yourself that cover calls are only for people who have large portfolios who can buy a hundred shares of the stock we're going to discuss all of those things and how you can find opportunities even if you have a small portfolio through our opportunity report and then i'm going to share with you some of my general trading tips things that you should be looking out for when you're selling cover calls and more importantly how to manage them once you are in a cover call and then we will open this up for q a here at the very end but the primary thing that i want to help everyone walk away from today's session is a clear understanding as to how you can generate consistent additional yield to your portfolio using options and i think the important part here is additional yield because you're probably earning some yield on your portfolio some stocks in your portfolio probably pay a dividend but how can you increase that two three four five times what you're currently getting from your dividend yield by adding this one strategy cover calls to your portfolio that's what i want to show you here today so my name is tony zhang i'm the chief strategist here at options play and i want to share with you the technology and the opportunity reports that we have built to hopefully help you implement what you've learned here today so let's first start off by talking about what is a cover call a cover call is very simple what you're doing is you're simply selling a call option now if you were just to sell a naked call option you would be taking on premium in exchange for truly unlimited risk and this is generally speaking not a strategy that you necessarily want to take it's basically the exact opposite of buying a call option how many of you here have bought a call option in your portfolio please bring up the chat window in the bottom of your screen and please type yes into the chat window if you've bought a call option before okay i see a lot of yeses okay so think about it the person who's on the other side of that transaction when you buy a call option you have limited risk in exchange for unlimited reward well the person who sold you that call option is the person who has limited reward because they're collecting the premium that you've paid and they have unlimited risk if the stock keeps going higher and higher and higher they'll keep losing more and more money basically the money that you gain they lose on the other side so why would anyone do this it's all for that premium now what you're trying to do here with the cover call is you're trying to sell that call option to the call buyer but because you're doing it with stock that you already own you don't have unlimited risk to the upside that's really the key here is you're selling cover calls because you have the obligation to sell the stock at a specific price no matter where the stock is but that obligation is covered by stock that you already own in your portfolio because when you sell a call option you have the obligation to sell the stock at a certain price sometime in the future and you're going to get paid to do so now what is that obligation to sell your stock at a at a higher price sometime in the future what does that sound like and for anyone who has ever bought a stock or etf you're going to realize that that sounds exactly like placing a limit order because when you place a limit order so if you have an if you have a stock and you place a limit order at 95 to sell the stock what does that obligate you to it obligates you to sell the stock at 95 when the stock rallies to that price well a cover call is very similar in nature it obligates you to sell that stock in exchange for the stock that you currently own in your portfolio and there's only one limitation to the strategy it's because for every call option you sell you must own at least 100 shares of the underlying stock whoops you must own at least 100 shares of the underlying stock so for a lot of the traders for those of you that are watching maybe you have positions where you only own 50 shares of the stock or 20 shares of the stock and you don't have 100 shares of it well we're going to address that into in terms of how you can potentially find opportunities with this strategy even if you don't necessarily have 100 shares of a lot of a lot of different stocks so the goal here is to really help you collect yield on the stocks that you don't that you do have at least 100 shares of to help supplement the income stream of your portfolio that's the whole goal of selling a covered call and this is by far the number one options income strategy or actually just number one outright option strategy all together forty percent of all trading transactional volume is in this one strategy alone and there's a reason for why large institutions sell cover calls on the equity positions that they own does that make sense please type one into the chat window if that makes sense to you perfect okay so i think the best way to learn is to go through example right let's say you own a hundred shares of seagate technologies and it's currently trading at ninety dollars and you think that your goal is to share sell 100 shares of it at a hundred dollars which is your price target so you own some stock at 90 dollars you think the stock's going to hit 100 so what you want to do is you want to basically take profits when the stock rallies to the 100 target price that you have on the stock so this is really where we split the experience into two you have your stock investor and then you have your options investor as a stock investor and many of you here on the on this call are currently invest or trade in stocks uh you know it's very simple you place a limit order at the price at the target price that you have and you simply wait you wait for the stock to rally and when you place a limit order this doesn't provide any type of income when you place a limit order you have an obligation but you have no income from it the options investor on the other side would look at selling let's say a 100 call option so we're in october right now maybe let's look at selling a november 100 call option and the 100 reflects my target price but the difference here between a limit order and a cover call is that when i sell that call option a call buyer the buyer who's buying this 100 call option for me is paying me a dollar to do so so what i'm doing is i'm obligating myself to the exact same obligation as the equity investor but i'm getting paid one dollar to do so and what this does is it generates an income stream because between now and november expiration i keep a dollar no matter what happens if the stock rallies the stock declines if it moves sideways if i hold this call option to expiration i keep the one dollar that i sold the call option four and this is what can generate a potential income stream and let's take a look at the difference between the two so if i own the stock at ninety dollars a share and i place a limit order my max risk remains at ninety dollars a share but when i sell a cover call it immediately gets reduced to eighty nine dollars a share doesn't sound like a whole lot but i'll show you how this adds up in the long run uh so right off the bat once i sell a cover call i have lower amounts of risk in my total trade because now my cost bases are reduced from ninety dollars to eighty nine dollars my potential reward gets increased because by a limit order my potential reward is exactly the same if i bought at 90 and i sell at 100 my potential reward is 10 a share but if i sold the cover call my risk reward gets skewed not only is my risk reduced my potential reward is increased so instead of risking 90 to make 10 i'm risking 89 to make 11. again doesn't seem like a whole lot but we'll show you how this starts to make a difference in the long run and then when you sell a cover when you place a limit order you have exposure in the stock so the stock goes higher or lower you're exposed to that and the only thing you have to show for that exposure really is that you can potentially collect dividends until the stock reaches your 100 dollar price and then at which point you will no longer have an exposure in um in in ck technologies now if let's say you were to sell a cover call in this particular case i'm generating one dollar in roughly the one month time that it takes for uh the stock to rally but the stock may take more than a month for it to rally to a hundred dollars may take three months maybe take six months or a year and as long as i ha i use a cover call strategy each month longer than it takes to reach my 100 price target i can keep generating income in that portfolio so not only do i collect dividends i'm also going to add on top of that the cover call yield that i collect now keep in mind one dollar on a hundred dollar stock is one percent but that's one percent over about a month and a half of time so if i can do that consistently throughout the year that's going to generate a fair amount of yield and many times you're going to see that amount of yield is greatly significantly higher than the yield that you get from the dividend stream itself does that make sense please type 2 into the chat window if that makes sense to you and the goal here is to simply replicate what you are doing right now with a limit order but adding an income stream on top of that and this is really where the the the rubber meets the road in terms of practical uh application of this type of strategy because the the efficacy of this strategy is completely dependent on what expiration date and strike price you choose on this specific strategy so i'm gonna do a little bit of an experiment here okay i'm let's just focus on one thing at a time i'm just gonna tell you outright we've back tested cover calls about just about every single possible expiration date you know everything from a few days out to all the way to about six months out we tested various expiration dates and the optimal expiration date is usually about 45 days out okay so i'm just going to tell you that now what i want everyone to think about is what strike price would you choose seagate technology is currently at 88.60 you can choose let's say a 95 a 97 or let's say 100 i'll give you three choices three different strike prices 95 97 and a half or 100. now if you sold the 100 call option this will collect about 75 cents that is 0.84 of the stock's value over the roughly 45 days and that's gonna annualize out to about seven percent if you told the 97 and a half you're going to collect just a little bit over a dollar that's a 1.18 of the stock's value that annualizes out to 10 percent if you chose the 95 you're gonna collect a dollar fifty that's a raw return of one point five percent and annualizes out to fourteen point five six percent so i'd like to ask the audience here if you had the choice between the three 95 97 100 choosing a dollar fifty a dollar or 75 cents an income which one would you choose type your answer in terms of your strike price on the chat window um 97 95 100 195 okay so the the the it seems like there's a lot more 95s and 97s um next time i'll do a poll so that i'll see kind of what what people actually um provides but um and there's a couple of questions saying it depends on if i want to keep the stock it depends on other factors um if i want to sell um and and this is really where the science forum from our back testing is very clear there's no dependencies no matter where you think the stock's going to go or dependencies what you want to use is a probability based approach to collecting income and our del our research shows that you want to use delta a probability based approach to cl to selecting your strike prices and what does 15 delta mean 15 delta call option means that there's a 15 chance based on the implied volatility of the option that this stock will be above 100 at expiration that means you have about an 85 percent chance that you're gonna keep your 75 cents 85 chance you're going to keep your 75 cents and a 15 chance that you're going to take profits on your stock and you're going to sell your stock at 100 now why does this strategy this 15 deltas why does this perform better in the long run versus this strategy which collects a lot more income right why wouldn't you want to collect a lot more income a lot of people selected the 95s because you're you want to collect as much income as possible 14 and a half percent of income certainly sounds better than collecting seven percent of income however what you have to realize is that when the stock rallies here you're collecting a dollar fifty but what you're doing here is you're actually only collecting an extra 75 cents and what happens what are you giving up for 75 cents what you're giving up is a whole five dollars of upside so if the stock rallies substantially what would you rather have five dollars in capital appreciate capital appreciation of the underlying stock or would you want an extra 75 cents an income i think the answer is pretty clear for everyone right everyone would prefer to have that five dollars an upside versus an extra 75 cents in income and that is the the scenario that plays out over and over again when you when you sell hundreds if not thousands of cover calls throughout your lifetime guess what the extra 75 cents is not worth it because you're gonna consistently give up two three four five dollars in an upside in exchange for that extra 75 cents and that is a formula that does not work out for you in the long run so whenever you're choosing strike prices to sell for cover calls you always want to select roughly hi very low delta 15 20 even 10 deltas those are the sweet spots if you want and what you're going to find is that the the yields are not going to be super attractive but they are going to give you that upside and remember the most the biggest amount of risk that you take with a cover call is the fact that you have risk in the underlying stock you you're take you're exposing yourself to the stock in order to offset the risk of taking that risk of owning the stock you better get paid when the stock rallies but if you sell a cover call that's too aggressive and you're just trying to collect an extra 75 cents what you end up giving up is a lot more upside this is kind of exchanging short-term greed in exchange for long-term capital appreciation so that is again the um the upside that does not make sense for you in the long run and for those of you that's saying it should be 75.75 cents that's you know um that's yes you're you're right but then you have to then multiply the stock by a hundred shares so you know difference between eighty eight and a hundred dollars is not twelve dollars it's twelve hundred dollars so what you're doing is you're giving up seventy five dollars in exchange for uh you know 500 so the two are you know is the same at the end of the day so it's really important that when you think about cover calls you don't prioritize income even though we talk about it as an income generating strategy income is not your sole focus your sole focus is that you are able to capitalize on the appreciation of the stock that you own when the stock rallies and the goal here is to basically pick a strike price that's so far out of the money that it really takes an outsized event maybe some kind of unknown news event something that kind of really catches you by surprise and allows you to take profits from that and then when the stock is just doing its normal thing it's moving its normal up and downs you're trying to collect a roughly in this particular case about seven percent in the underlying stocks value and keep in mind this is a stock that generates three percent dividend yield so even in just when the stock is doing its normal fluctuations month to month you're still tripling the doubling the dividend yield you're tripling your your um income because you're going from three percent to almost 10 when you add the dividend yield plus the cover calls and when the stock rallies significantly you're going to participate in that you're not going to lose out on that big move to the upside when you choose these lower delta strike prices does that make sense everyone please type 4 into the chat window if that makes sense to you if you take nothing else from today's session this is the most important thing that you want to take away from today's session is choosing these low delta call options that have relatively low yields compared to those more aggressive calls but you're going to be able to capture upside in the underlying stock and that's what's going to pay dividends in the long run so let's talk a little bit about the tools that we have built here at optionsplay to help you find these opportunities you're going to find them in your hub which is something that you can access from your options play tool where you have the link here at the top called education and resources when you click on that link it's going to take you to the options play hub within the options play hub you're going to find the cover call report that's going to help you find opportunities for this specific strategy and not only is it going to help you find opportunities it's actually going to find the specific expiration date and the strike price for you so that you don't have to go pulling up an options chain and figuring out what's the 45 dealt what's the 45 day 15 delta strike price for apple or whatever stock that you're trading this report does it all for you and what we do is we sort the report based on raw return meaning how much premium are you actually collecting as a percentage of the stock price from this cover call and it's sorted for you based from highest to lowest so i usually tell investors simply to go down the list but we've simply recently entered a search function so what you can do is you can just search for the stocks in your portfolio so if you own facebook you can simply type in facebook and it will tell you to sell the november 375 375 strike and remember the stock price is currently at 332 dollars so this is a strike price that's about 40 45 almost 43 dollars out of the money so the stock has to rally 43 dollars in the next 43 days before the stock is called the way otherwise you're going to collect 0.77 of the stock's value which is an annualized return of six and a half percent and this is something that you'll be able to do as long as the you know facebook is just fluctuating it's normal fluctuations it has to make an outsized move to the upside in order for your stock to get called away and if that happens guess what you've made a lot of money on facebook stock the stock has rallied forty dollars multiplied that by a hundred dollars that's a four thousand dollar gain on the underlying stock that you've made in addition to that you've collected here about two hundred and fifty dollars in potential income so if this is a you know for example if you own facebook stock you can click on the facebook symbol here on the left hand side but when you click on it it'll bring the trade up here in options play so we've really tried to make these reports as easy as possible so that you can quickly find the opportunities and then evaluate the trades in facebook remember facebook is a tr isn't stock that pays zero dividends and if you own the stock currently uh currently it's obviously a little bit of a pain pain uh painful trade at the moment but this is where you can add an additional six and a half percent yield to your portfolio by holding facebook and selling cover calls against it this is really how you can go about deciding whether this is the right trade suited for you i generally tend to find that i want to at least double the dividend yield on a cover call right so here i'm i'm i'm getting nothing from the dividend so getting a six and a half percent return is fantastic in terms of being able to to um to look at this and the stock has to rally in this particular 375 whoops 375 um and the stock and even if the stock does rally 375 dollars i would make 4 823 and 50 cents from where facebook is today in order for that to happen so this is really how you can go about analyzing the trade and if you want to place the trade click on the trade button and you'll have everything you need to enter this trade into your platform if you already own the stock then you only have to sell the november 19 uh 375 call collecting 2.55 cents or 255 for the contract now this is really where you have to look look for the stocks that you own now in our old spreadsheet you had to search for it now or you had to go down the list finding the stocks that you own now you can just type it in into the search function on the upper right hand corner this is a report that generates every single hour throughout the trading day so you're always going to get the latest opportunities based on where the market's currently trading so we can take a look at a few other opportunities let's just take a look at some of these i'm going to try to find some stocks that many of you own in your portfolio let's let's take a look at um you know let's look at peloton because recently we've made a trade here on peloton peloton is currently trading at about 87 and a little over 87 this is telling me to sell the 110 strike price which is a strike price that's 25 above the current price the stock has to rally 25 in the next 43 days before this stock is called the way otherwise i collect 1.6 of the stock's value in the next 43 days which is an annualized return of about 14 percent okay so let's take a look at this peloton trade here [Music] i'll close this one out we'll open up peloton so let's say you're bullish here on peloton like i laid out here right which you know what i was saying is that we've hit this double bottom here this was an opportunity to play for a bounce we gotta bounce here today so maybe you think that peloton's gonna rally and 110 is pretty high up here 110 is all the way up here right the stock has to rally all the way up to about 110 in order for the stock to be profitable and i would say that if the stock rallied up to 110 that would be a pretty successful trade and i'd be pretty happy with selling my stock at 110. but as you can see here what i'm collecting is a dollar forty now a dollar forty doesn't sound like a whole lot but on an eighty seven dollar stock that's one point six percent of the stock's value so i'm collecting 1.6 percent uh in just 43 days and this is a stock that pays again zero dividends and what i'm trying to do is i'm trying to collect in this particular case 14 yield while i hope that the stock is going to make a big move here to the upside and what that means is that if i do this over and over again throughout the year even if the stock was declined 14 over the over the next year as i hold the stock i'm not gonna see any losses because whatever i gain in my cover calls i'm gonna or whatever i lose in the underlying stock i'm gonna gain back from my cover call so i have about a 14 roughly 13 and a half percent downside protection if i'm able to sell cover calls consistently throughout the year and if the stock does rally 25 at some point throughout the year i'm gonna capture those profits and simply hopefully take those profits and roll them into the next trade and we'll talk about kind of how we roll that into the next trade in our next session but today i want to focus on how do you take profits on the stocks that you want in your portfolio and when the stocks are just moving sideways and moving a little bit sideways you're able to collect a fair amount of premium for your um for your stock and when the stock rallies significantly you're able to take profits on that does that make sense please type five into the chat window if that makes sense to you i'll just look at one more example just to kind of drive this stock home and let's look at some stocks that are probably widely held um you know what's a widely held stock um that's oh you know what one thing that i do want to point out here let's just go over this one thing right here are some tips that i generally recommend if you're thinking about finding opportunity to sell cover calls i always recommend that you focus on stocks that you're familiar with and stocks that you're comfortable investing in you should never you know look at this report and look for those really high yielding stocks and just only buy those stocks because and buy them just purely for that because the cover call premium is not enough to offset some of the risks that you might take so you should only sell cover calls on stocks that you are comfortable and come and familiar with investing in and then when for those of you that do want to seek higher yielding income portfolios what you simply want to do is sort by the raw return which is the column that is defaulted that it's defaults to it defaults to sorting by the raw return and what you simply want to do is go down the list and find the first stock that you own in your portfolio so let's say you own ccj because you've been buying some uranium stocks you think they're going to do really well so you have some ccj and this is telling you when the stock's currently trading at 22 if you sold the 29 call option you'll collect about 40 cents or so and what this is going to yield is about a 15 yield and the stock has to rally about 30 percent in the next 43 days before the stock gets called away otherwise you collect about 15 percent annualized yield on your portfolio and you can just keep going down the list and you can say okay and now i own i also own some snapchat and then you can do the same thing again and you just keep going down this list and you can keep finding opportunities on stocks that you own and the ones that are near the top of the list are the ones that yield the most income and the ones at the bottom of the list are the ones that yield the lowest amount of income okay so the other thing that some of you do want to be aware of is there's an earnings flag we have an earnings flag on our report and the earnings flag basically tells you is there earnings between now and expiration if the answer is if there's a yes that means there is earnings between now and expiration if the answer is no then there are no earnings between now and expiration so obviously etfs do not have earnings and then if you have uh for example stitch fix which doesn't report earnings until december 6 when you when you sell whoops uh stitch fix where did it go um s f i x so as you can see stitch fix doesn't have earnings until december 6th so that's why it has an earnings flag of no and you can use this to hopefully help sort for opportunities some of you like to sell cover calls going into earnings some of you don't so you can easily sort and filter those out and lastly like i said i tend to find a lot of investors tell me that cover calls are only for big accounts they're really not there are plenty of lower price stocks that you can focus on selling cover calls on so you can actually sort this list based on stock price so for example ford is probably a good one right now um stocks at 14 a little over a shy of 15 if you sold the 17 call options you're going to collect about 18 cents that's going to come out to be a 10 yield and the stock has to rally 15 the next month and a half in order for this to get called the way and you can buy stocks here in the lower price range so ford this is only 1400 for every 100 shares jetblue fifteen hundred dollars uh for a hundred shares uh kinder morgan energy stock sixteen hundred dollars seventeen hundred dollars and you can kind of keep going down those lists american airlines two thousand dollars and you can find stocks that you want to buy that are in the fifteen hundred two thousand twenty five hundred dollar range for every one for every one hundred shares so if you're gonna have a smaller account you can still trade this underlying strategy a tnt falls under them there's a lot of them in this particular category here right now there's been plenty of stocks under 30 that you can choose that have a high amount of yield for these types of trades so you can search for this based on yield and quickly gauge how much income that you're actually collecting for these opportunities so that's just some of the tips that i have so let's talk a little bit about um what to do once you've sold the cover call and the stock either rallies the stock moves sideways or the stock declines okay so let's first talk about when the stock rallies so you sold the cover call and the stock rallies significantly i see a lot of traders will ask me questions they tend to panic right you sell a cover call the stock rallies and you see this large unrealized loss on the short call that you've sold right and this is where i see a lot of traders panic and they ask me what do i do i have this huge loss on the short call that i've sold and i always tell people don't panic you never you should never panic when the trade is going in the direction that you wanted to and remember when you sell a cover call you want the stock to rally because you own the stock and the stock rallies you make money so don't be concerned when the stock rallies after you sold the cover call the rule of thumb here is that when the stock rallies you don't do anything you simply hold the position if you need to roll the position because you think the stock is going to you think the stock's going to keep running and you think it's there's further upside and this is usually because there's new information that has come out right so before when you sold the cover call you had a target price of 100 maybe some earnings came out maybe some news came out now you think the stock's going to go to 120 with some new news that you have then this is really the only time where you might want to conserve consider rolling your cover call that means selling your existing cover call and selling i'm sorry buying back your existing cover call and buying uh selling a new one buying back the old one selling a new one and a roll is just a fancy term for doing both trades in a single order it's not something special there's nothing new to it you can do it as two separate trades but if you do it as a single trade we call it a roll there's no special uh um you know opportunities and roles that you don't get elsewhere but the room the most important part to remember is that if the stock rallies sharply after you sell a cover call do not panic you want to hold that position because many times the stock will rally significantly and maybe after a couple of days it comes back below your strike price so many times big moves will be preceded with a bit of a gift back so don't panic when the stock rallies significantly because a lot of times sometimes i see investors after the stock rallies they start buying back their calls and the second they do that what you've done is you've locked in a loss on the cover call you don't want to lock in that loss you always want to have the market give you the opportunity of giving back and for your cover calls to still expire worthless and keeping that income if you roll your cover calls here guess what you've locked in the loss of that of that initial cover call and if the stock declines let's say the stock was deployment you only have a limited amount of reward to show for it versus the the risk that you took on the short call to the upside is in theory unlimited even though it's it's offset by the stock that you own but on the way down if you sold if you rolled your cover call you're limited to how much premium you've you've collected on that second cover call so don't roll your cover calls early and this is really where i cannot stress enough for investors who are who who are pissed off if you will when they sell a cover call and the stock rallies substantially you have to adjust your mindset on this because you should be happy when the stock rallies significantly because you know the the when you're unhappy because the stock rallies significantly is the same reason you're basically uh unhappy that you weren't able to sell the stock at that exact price guess what you're never going to be able to so stop being beating yourself up and being pissed that you didn't buy here um you know that you didn't buy here and you didn't sell there because that's just never going to happen be happy that you bought here and then sold it i don't know here because that's what a cover call is going to allow you to do you're never going to be able to eke out every single penny so if you if you sell a cover call let's say let's say the stock is trading sideways here you sell a cover call up here and the stock rallies significantly and now you're able to take profit on it you should be happy with that because basically the stock that you thought was going to go up did go up it reached the target price that you were happy with and you're now able to walk away with the profit and you're able to take those profits and roll them into the next stock that you can buy that hopefully will also rally significantly as well so you really have to change your mindset that when the stock gets called away that's really a good thing now i will say it's only a good thing if you follow the methods that we're showing you because we're selecting strike prices that are pretty far away and the stock means to rally significant in order to get there if you have an 88 stock and you sell a 90 call option and the stock rallies to 100 i can see why you're pissed because you gave up ten dollars of income in exchange for an extra couple of bucks of inc you gave up ten dollars an upside in exchange for an extra a couple of bucks in income and you're pissed off about that well there's only one solution for that selling cover calls that are far away those 15 delta call options those are that's how you protect yourself from these types of concerns does that make sense please type six into the chat window if that makes sense to you perfect so what happens is the stock trades sideways this is kind of your best case scenario you simply hold your position you can roll it if you want to once you've made 75 of the max reward on that cover call but there's no harm in holding these trades to expiration so if the stock doesn't really move it's trading a little higher a little lower you can either hold them to expiration for those of you that want to be a little bit more proactive if you buy back a call once you've made about 75 of the premium you can sell another call and generate a little bit faster yield if you will but that really depends on how much time you have and whether you're managing these trades every single day but the most important thing is that when you sell these cover calls that are moving sideways a lot of times after the calls expire we forget to the following monday to to start selling cover calls again because you want to keep collecting income and the for the income stream to work you have to keep selling cover calls so remember once the following monday um once the expiration friday comes remember the following monday you have to get back on selling cover calls so you go back to this report i look at this report you know most mondays because that's when my friday cover calls have expired and now on monday i got to sell a new cover call use these reports for your um build into a habit we send you these reports on mondays as well in an email for those of you that are members and for those of you that are on a free trial you get an email as a reminder on mondays because that's when you want to initiate these cover calls and lastly if the stock declines this is really the only scenario where it makes sense to do something early because you sold something for maybe a dollar now you can buy it back for at least 12 for maybe about 20 percent of the original premium so if you sold something for one dollar and it's now trading at 20 cents so if you sold something for a hundred dollars and it's now trading at 20 cents uh or rather one dollar and now it's trading at 20 cents then buy back the cover call and sell a new cover call you're gonna have to reduce uh you know lower the price or strike price you sell it at but you're going to be able to collect more premium do not let these go to expiration because what you're basically doing if you let these go to expiration is you're not going to be able to generate additional premium and especially when the stock starts to decline you want to generate more downside protection you have an opportunity opportunity to do so take that opportunity when you're able to buy back the cover call that you've sold for 20 or less than what you originally sold it for but the primary thing that you do want to start asking yourself at this point after this stock has declined is not necessarily do i want to keep selling cover calls but the more important question is do i want to remain invested in the stock now maybe something has changed maybe there's been a material change in the fundamentals maybe new earnings have coming have come out maybe the ceo has resigned maybe the stock is just you know underperforming the broader markets and you're reconsidering whether this is a stock that you want to own that's a question only you can answer but if you choose you should always make your decision based on that first do i still want to hold the stock because that's where your biggest risk is if you don't want to hold the stock get rid of the cover call and sell the stock don't it doesn't matter where the cover call is sell the stock get rid of the cover call your primary decision once the stock starts decline should always be focused on the stock not on the cover call does that make sense please type 7 into the chat window if that makes sense to you perfect okay so we've covered what a cover call is we've gone through an example i've shown you the reports as to how to find these opportunities for your portfolio how to analyze it using options play and how to manage these trades once you're in that cover call hopefully this gives you a strong understanding of the strategy how to implement it and then once you've implemented it how to manage these in all three scenarios so with that what i want to just thank is our members for supporting us and allowing us to continue to do this if you're watching this especially if you're watching a recording and you want to have access to the tools i'll show i've shown you here today the options play platform the cover call reports you can sign up for a free 30-day trial at optionsplay.com you're going to get access to daily trading signals you're going to get access to the platform as well as the cover call reports and you're going to be able to learn with us on our thursday options education sessions and our market outlook sessions that we host every single week to give you an understanding as to our views in the broader markets and that is all available to you at optionsplay.com which you can post into which i will post a chat into the into the chat window with that uh what i will do is open this up for q a there is a q a section and a chat window here please type your questions in the q a section and i'll try to answer as many questions as i have time for today are all the stocks in the cover call function rated bullish no so this covers all stocks right because you don't just own bullish stocks in your portfolio you might own some bearish stocks you might own some stocks that you think are going to turn around like peloton so no this is not just bullish stocks this is all all liquid stocks and all s p 500 stocks and all liquid etfs are covered in our cover call report i assume we can use the cover call report for buy rights yes you can absolutely tony is the best teacher for options education and a great platform individual trader shintel thank you so much yes we we are actually in the process of launching a mobile app as well and we're gonna be you're gonna be able to access the cover call reports you're going to be able to access uh basic analytics on the new iphone app here as well iphone and android i should say but wouldn't you rather wait for the stock to rally then sell a cover call for premium so super g i asked him great question his question was why why shouldn't you wait for the stock to rally then sell a cover call so let's say for example what he's saying is why don't you wait for the stock to rally then sell a cover call and then hopefully when the stock drops you're going to be able to collect that cover call premium and super g you're right from a tactical perspective that certainly would be the best time to sell a cover call but notice how there's not many opportunities for that you may have one opportunity here and one opportunity there so the goal here for cover calls is to generate cover calls or generate income every single month and what you're trying to do is take advantage of that premium every single month if you only wait for the market to top and then sell cover calls then you're only generating income a very small percentage of the time throughout the year so you're really not getting the benefit of the income stream so you can do that but you're going to miss out on most of the income i'd like to know how about your uh your tour money management how much would you risk on a single position so if we're talking about you know your stock positions we tend to find that you can risk about at least five percent of your stocks portfolio in a single stock and that's simply because the chances of a stock going to zero are relatively low compared to buying a call option and the chances of that going to zero are substantially different um ron is saying looking at peloton and options play it suggests the october 29th one uh let's look at peloton so ron i think what you're referring to are the cover calls based on your income setting so you might have it set to short term optimal or short term aggressive and that will show you the cover calls based on your income settings so that's based on your income settings and maybe you have it as set as short term optimal yep short term optimal that's why you have the october 29th 100 call options you can do that right um so this is based on your own settings uh our cover call report is based on our back tested um optimal settings for cover calls so i do encourage investors to try to use the cover call um report because it's going to give you live prices of what we consider as the optimal cover call are there any rules on selling cover calls around dividend payments yes generally speaking if the stock is paying a large dollar amount in terms of a dividend uh you may be at risk of early assignment on that cover call um but you know keep in mind that it's kind of net net the same right because you're getting paid that dividend uh as the stock investor um so rather i take that back um you are if you are at risk of early assignment so i'll walk you through this basically this is usually a concern in the last one to two weeks in the last one to two weeks if the dividend amount is greater than the extrinsic value meaning the value that can decay at expiration if the dividend amount is greater than the extrinsic value of the option in the last one to two weeks especially if it's in the money and this is only applicable if it's in the money if the cover call that you've sold is out of the money there's no dividend assignment risk only if a cover call is in the money and the dividend amount is greater than the extrinsic value that's left in the option that's when you have risk of early assignment otherwise there's no risk to you uh so super g yeah if you're underwater on on a stock yes you know i understand that you are concerned about selling cover calls but this is really where cover calls is a strategy that you have to start from the very beginning you cannot sell cover calls uh you know after the stock is down 40 it's too late to start selling cover calls after you bought the stock and it's down 40 percent now you're trying to generate income we're trying to build some downside protection i'm sorry you have to start this as soon as you own the stock to pick my strike prices and strategy to buy the stock then determine my exit price and finally pick my cover call the higher price than my exit price um so no what you want to do is you want to buy the stocks that you want to own and then use the cover call price to help you determine what is potentially a suitable target price and again these target prices are based on the stock rallying significantly looking at a firm the stock's at 133 this is selling a 195 the stock has to rally 45 percent over the next 43 days before it gets called away you can sell a cover call at your specific target price if you want that certainly is a different strategy than this but this is really using a probability based approach but you can also sell it at your specific target price if you have a specific target target price that you want to choose can you sell cover calls weekly bringing less but more frequent than just selling 45 days you can daniel but i will but what you're going to do is you're going to have your stock called away far more often the reason that we sell 45 days is because you want capital appreciation of your stock if you sell weekly options you're gonna sell calls that are probably two three percent out of the money and normal fluctuations will get your stock called away and you're not getting that capital appreciation i mean you typically own a stock because you want the stock to rally significantly and if you sell weekly options against it maybe two weeks in the stock gets called away and maybe it's an outsized move for two weeks but an outsized move in two weeks might just be two three percent move and now you you've you're out of the stock that you think is gonna rally you know five ten fifteen percent after just a three percent rally in a single week so that's why you do not sell weekly options on cover calls uh you've mentioned that you've now you never see an option get assigned with more than 21 days left that did just recently happen to me with iron condor got assigned to 22 days left however it was an in the money put that i sold because they didn't want to buy in the stock drops so james um it is always possible right and i mean i i bet that the stock dropped substantially i'm not from i mean i haven't looked at iron mountain recently it must have dropped fairly substantially below the strike price and also you know this pays a fairly substantial dividend a 5.6 dividend so that's probably why you saw that assignment um but it is very rare outside of 21 days how do i find the low delta on stocks not on the list so okay so howard great question howard's saying how do i find it for stocks that are not on the list so let's go back to options play let's say i'm just making up a name here right but let's say for example harley davidson is not on the list so what you can do is you can go to modify and you can select the expiration date that you want let's say you want to go to november 19th and when you select the strike price the strike price has this column here on the right hand side that has the delta so the 41 is a 24 delta the 42 is a 20 delta the 43 is a 16 delta so in this particular case i would choose somewhere between 42 and 43 somewhere between these two strike prices maybe the 43 as you can see that will be the 16 delta so this will generate 9.4 annualized yield on a stock that generates 1.3 yield at the moment so this is allowing me to collect about uh you know four times the dividend yields on harley-davidson by selling the november 43 calls and the stock has to rally pretty significantly from the 36 dollars that it's trading out right now all the way up to 43 dollars which is the prior resistance so basically it gets yourself back to this prior resistance level the stock has to rally that much in order for the stock to get called away otherwise you're collecting nine percent yield um and nine percent yield is probably going to look pretty good on a stock that continues to trend lower as you're trying to buy some more downside protection uh when the stock moves sideways can you let it literally expire yes if the stock moves sideways you can let it literally expire and come back the next monday um and uh uh you don't know if it hasn't if it's nowhere near your strike price you do not need to close it before expiration uh can you check intel sure let's take a look at intel intel is currently trading at 54.24 cents this is telling me to sell the whoops the dollar strike price so a strike price that's about ten percent out of the money i'm going to collect 0.86 percent uh over the next 43 days which is annualizes out to 7.26 um so looking at the november 60 call options on intel uh so i think i've referred to you know the why i don't believe in selling short dated cover calls it's because you can have a quote unquote outsized move in a weekly move but that one to that two percent move which is outsized for that one week takes you out of the stock entirely don't do it what about selling cover calls in a week oh i've already answered that um are index etfs listed on this report um if there are income uh opportunities yes i not all of them are here some of the you know on spy you're just not generating enough income for these types of trades um you know iwm is on here eem i believe is on here rsp is on here so quite a few of them are on here i yt so a lot of them are on this so etfs are listed 75 gain at one point at what point during the trade i'm not sure what you mean by william if you sell something for one dollar and it's now trading at 25 cents then you've made 75 of the max reward that's the trigger point of which you might want to just roll your cover call buy back the cover call pay 25 cents and hopefully sell another option 45 days out for another dollar i usually get into the stock by selling a put option for where i'd like to get in any problem with this none whatsoever sean this is what you do after you sell that short put and i'm actually going to cover short puts next uh this is just one half of the equation i really wanted to spend some time on just one half the equation and showing everyone how to really master cover calls once you've mastered covered calls then we're going to look at short puts so you've got one half today we're going to cover the other half next time and we're going to combine them into what we call the wheel strategy where you're selling cash secured puts collecting income to buy puts at a disc buy stocks at a discount once you've bought those stocks at a discount you put in a cover call to generate a yield on the stocks that you own in your portfolio and collect a yield and once the stock rallies significantly you then take the profits and you put them back into selling puts again regarding a poor man's cover call would you say that's too risky of a strategy no i would not say a poor man's cover call is too risky of a strategy i'm not sure what you mean by why that would be any riskier than this particular strategy uh wayne thank you so much what do you think about investors that run the wheel strategy hopefully i just talked about that um you know we're gonna cover puts next so today we spent all our time talking about you know one half of the the wheel strategy next time we're going to talk about the other half selling puts uh poor man's cover call you choose the exact same deltas and the exact same strikes for poor man's cover call is it better to wait for an update to sell instead of a down day james you can if you want to be a little bit more tactical there certainly is probably some statistical edge to doing so i will say that if you wait as many times you end up losing out on income and you end up losing out on um well you really just lose out on income what are other also don't realize is that not only are you making monthly income you're lowering your cost basis on the holding yeah greg is saying he loves cover calls for those reasons so thank you so much greg for sharing that uh should i run cover call on stocks on which i'm losing money so you can but i will say that if you're already down 30 40 50 on a stock that you own selling cover calls on it may be a little too late that's why this is a strategy that you want to apply to new holdings that you acquire in the future rather than stocks that you're down a lot of money on but stocks that you're up a lot of money on very pr you know i certainly recommend selling cover calls on those when does it make sense to buy back a cover call instead of letting the stock being called away in a big price jump so like hopefully i answer that question for you in our session where i discussed exactly that um you do not want to buy that early on a buy back that cover call early when the stock jumps substantially um i don't remember tom sosnoff suggesting a delta of 35. if he did uh you know you're gonna have to ask him why he chooses 35 i think our back test as well as quite a few other industry back testing companies if you look at oh rats which is a company that specializes in options back testing they've done a huge cover call back testing and their conclusions are almost identical to us they choose i think either 10 or the 15 delta cover calls they use the 30 and 45 days as their optimal settings um you know we're talking about institutional customers wealth pension funds that use this type of strategy that have back tested this and consistently the results clearly show that those really high um delta or sorry really low deltas very high strike prices are the ones that generate the most um the best beneficial outcome in the long run and that outcome includes the stocks that you own in your portfolio because you don't want your stocks to get called away too early otherwise you're missing out on upside in the stocks that you own can't the delta move substantially on some stocks in 45 days wayne i'm not sure i understand your question i don't know what you mean by that you only you're only concerned about the delta at the time you established the trade once you establish the trade the deltas can move no matter that doesn't matter to you you only want to select your strike prices based on the time that you enter the trade a few people have asked me to check some stock so just come to the to the report ath i don't have one on here pins i do have one the november 65 calls uh so on the options play platform click on the education and resources section here on the right on the upper right hand corner that's going to bring you to the options play hub and then within the hub you'll see the cover call report when you access it you'll be able to type in your own symbol here on the upper right hand corner type the symbols on the stocks that you own that'll quickly help you find these opportunities so with that that covers the questions that i have time for here today i hope that this was helpful in giving you a better understanding as to how to use these types of strategies and hopefully help you master selling cover calls on your portfolio with that thank you so much i hope you guys have a great trading day and just a quick reminder again for those of you that are on uh that want to sign up for a free trial to everything we discussed here today you can do so at optionsplay.com thank you so much and have a great trading day

Channel: OptionsPlay

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Keywords: options trading, options education, OptionsPlay, Tony Zhang, technical analysis, trading, trading education, CNBC, options strategy straddle, options, options strategies for small accounts, options strategies for income, options strategies for regular income, options strategies for market crash, day trading options strategies, trading options, how to trade options, investing, economics, the number one options income strategy, top options income strategy, options for income

Id: 8QiqC900Vk0

Length: 58min 1sec (3481 seconds)

Published: Thu Oct 07 2021