Options 101: EASY MONEY w COVERED CALLS - showcasing a real trade, and how I nail Asymmetric Bets!

hey everybody welcome back this is something that you guys have been very interested in since i started doing my micro strategy options videos and a lot of you are hungry for my approach to trading options so i'm going to start with the very basics this is going to cover cover coils and let's just jump right in real quick so i'm going to call this options 101 it's going to be part of a longer series and i'm going to go deep all the way to the type of stuff i do now one thing i want to recommend is i've been doing this for 30 years so this is an area where i feel very comfortable i hope i don't lose anybody here i'm trying to make this as simple as possible but i want to show you all of the tools that i use when i make investment decisions and how i use covered calls actually myself with a real life example so first of all covered calls i like them because they're very low risk and very easy to do i'm going to show you exactly how i approach this whole area the other thing that i want to mention too which i find very exciting is we all know that a bitcoin etf is coming and what does that mean well i'm going to show you a covered call trade that i do with my whole trading thesis and my approach for another etf called jets and we can apply that same type of methodology to a bitcoin etf when it comes because when an etf comes so do call options now many of you ask why do i not trade futures from the cme on bitcoin today and that is because the spreads are so crazy i just can't find ones that actually work for me in my appetite the pricing is just off it's not fully baked but as these markets mature it'll get better and better and we will be ready for that so take this as a time to prepare and learn and do paper trading and many other things as we go forward so as i mentioned as well i'm going to show a real-life case of how to make 103 on your money and 120 days and how i did it with the jets etf back in november now a few things before we jump in this guy is mr munger from berkshire hathaway i don't agree with some of his trading theses today however he did say one thing and that is a concept called inversion it's always good to buy into weakness and sell into strength you know buy low sell high and that's exactly the premise that i want you all to think about as well i want you to always think as well of yourself on the other side of the trade because if you don't sit in those shoes and understand who is on the other side you will never be successful remember this is also a zero-sum game so for every winner there's a loser and ninety percent of options expire worthless think of that very carefully ninety percent of options expire worthless so do you wanna be in that ninety percent or do you wanna be in the ten percent therefore always think inversion and i'll show you how i approach that as well so call options i think many of you already know what call options but they give the buyer the right not the obligation to buy a stock or bond or a commodity or any other asset or instrument at a specified strike price within a specified period of time there are leaps which go out one plus years some of them are around two or three years and i actually bought some leaps back about two years ago on tesla which did very well now it's also important to remember that a core buyer profits when the underlying asset increases in price so another way to look at that is with the chart so if you imagine a dollar stock with a ten dollar strike and you sell that call option for two dollars this is what your profit line looks like if you are owning the call option as the share price increases so does your profit however if the share price goes beneath your strike price your call option becomes worthless and that's very very important to note but there's a few little benefits from that as well if you are buying a ten dollar stock that goes to zero you lose ten dollars if you're buying a two dollar call option on a stock that goes to zero you lose two dollars so there are plus sides and that's a big part of the risk management play of options as well so that's just call options important to have that background before we jump in now a covered call strategy means you buy the stock for example you have to buy everything in multiples of 100 shares because a contract is a function of 100 shares so you buy 100 shares and you sell one call contract or you could buy a thousand shares and sell 10 call contracts against your position and it's always good to sell and out of the money position when you are selling these calls or very close to being at the money but never in the money unless you really believe the stock's going to go down but then you shouldn't be in that trade anyway now this all sounds very complex and boring but it'll make sense when i show you the real life example so please hang in there and look for that actual real life trade for where you can make a hundred and three percent in three or four months pretty easily so a covered call strategy again think of a ten dollar stock ten dollar strike two dollar premium you can see that your profit is very quickly capped as the share price increases and that's very very important and your break even becomes eight dollars because you buy the stock for ten dollars and you sell two dollars in premium so you can actually ride that stock down to eight dollars and still be at break even and that's very important as well so it's attractive from a multitude of different perspectives before we go into the actual real life case i want to go over some key things one is the math to make sure you guys all understand things like margin one of the beauties of covered calls as well is the fact that you can buy stock on margin so you can buy a hundred shares of a ten dollar stock on margin which means you only have to put down five hundred dollars in cash and you borrow 500 bucks and if you're doing it for a short period of time the interest is actually very very low so you could sell the ten dollar calls for two dollars like i mentioned three months out the income is 200 bucks if the stock stays flat your profit's 40 i.e you put down 500 and you make 200 40 return if the stock goes up 20 the profit's the same again you cap your upside and if the stock falls 20 you're at break even so it's like a win a win and a break even it's only if the stock goes down more than 20 is when you start to lose money and that's what you would have lost anyway if you held the actual equity so you're saving yourself on the downside capping your upside now there's a few other things that you need to know when you play with these options and again not not a financial advice but options are very very dangerous remember 90 expire worthless so you don't want to be buying them unless you really really know what you're doing knowledge is king you need margin authority and you need options authority so what is options authority so there are different option levels within your typical brokerage account you can do covered call writing in fact you can do covered call writing in many retirement accounts as well and protective puts you can do index puts and calls you can do covered putt writing spreads naked put and call writing i do a lot of naked stuff i do a lot of naked straddles and strangles i'll introduce you to all those later if there's an appetite for all of that but again for this you have to make sure you have margin authority and level one options authority as well within your account now the other thing is very very very important is there's no such thing as easy money or free lunch so make sure you practice before you execute now the rule of thumb is if you if you're new to this whole area do what i call paper trading and that is simulate an actual trade so pretend you're going to buy a stock for 10 or 20 and pretend you're going to sell an option and simulate and watch it for a month and see how it does and i don't want anybody doing this for real until they have 9 out of 10 until 9 out of 10 or of their trades are successful and that sounds a bit draconian but again this is real money and you don't want to be losing but when you practice and you practice with paper money it gives you an awful lot of comfort to be able to jump right in now i'm going to show some key tools as well that will help you be more successful as well so let's talk a little bit about volatility and volatility can be your friend especially when selling options so volatility or vix the higher the vix the higher the options price the lower the vix the lower the options price so if a stock is super stable you're not going to get a lot of premium for selling them but if a stock is super volatile or has a big bounce it can really impact the price of options we're going to now jump into the real life case and how i approach an actual trade and how i believe you can safely make 103 percent on a trade in 120 days sounds like click bait but it's not and i'll show you all of the tools on my tool chest to be able to do this successfully so first of all i like asymmetric bets i like to have the odds stacked in my favor before i play very simple little graph here i think you all know what asymmetric bets are and remember zero sum game for every winner there's a loser which side you want to be on but to increase your probability of success you need to use all the tools in the tool chest that i'm about to show you right now as well so this is a quick graphic i put together which shows you my approach to asymmetric bets so you want to maximize your upside and minimize your downside so you need to look at things like risk management financial tools technical analysis hedging arbitrage which you all know i like to do you need a lot of quant you need to know your numbers you need a very important rule as well that i like in investing is know your exit before you enter okay and paper tray until it's automatic and have patience wait for the right opportunity and then do a lot of research both macro research and micro research and even down to the level of detail of an actual stock or etf or index or anything like that so if you don't have all three of these together for example if you don't do your research you've got no edge if you don't do your risk management you've got high risk and if you don't have any discipline things are going to blow up so think about that you need these three cylinders this three-legged stool to operate to be successful the first step in any trade is to build your thesis so for me and this is the real life situation so back in november due to c19 we all know what that is and i don't want to get demonetized so i'm not going to say the word travel was dead however i was tracking a lot of the medical news around the vaccine and there was a release on operation warp speed from the department of defense that a vaccine was over 90 successful and i was blown away by this success rate and i knew with that type of success rate airlines would start to come back probably in six months and i thought this could be great for the airline industry so this will happen on november 6th my bet was travel will come back my play was airlines could have been hotels or whatever else i chose airlines my target was the jets etf which doesn't look at individual airlines but a big basket of all the top airlines and my technical analysis looked at the chart and my quant examine the options so that's kind of a thesis and what i want to do is also with this community here that we have is share ideas i know a lot of you may have similar like type theses around bitcoin mining and i'm actually looking at a similar plays for some bitcoin mining cuts like like riot mining and hut 8 and others and i'm putting all that together so if anybody has any good information that would belong in a theses let's work together because two minds are better than one step two look at the actual chart so this is the chart on november sixth the price was about seventeen dollars and forty four cents the top was about nineteen bucks so upside was about two times the size of the downside the bottom was about 16 so buying at 17 when the bottom is 16 not too much of a risk but i thought the etf would bounce because of vaccine use that was going to come out over the next month or so let's see what happened sometimes i don't expect things to move it fast as fast so i got into the trade on november 6th that was a friday and on november 9th jets gapped open big time because of this vaccine news it was just sometimes the markets lag actual news it takes people time to actually put together a thesis but here we were the stock went from 1740 all the way up to 21. the vix the volatility went through the roof so i sold the march 2021 22 calls for two dollars and 19 cents and my cost basis now for the trade was six dollars and 31 cents i'll talk more about that in a minute as well when we come to the review of the actual trade the other thing that i like to do is i run my own black scholes models to to identify market pricing inefficiencies so i did this for the jet ctf i create one of these models with a whole bunch of different simulations for every single pricing to understand exactly where i should play which call i should sell or buy based on pricing based on what i believe the pricing should be based on what it actually is and believe it or not the options pricing is often way off for example the micro strategy put options were completely overpriced so selling them for over a hundred dollars when the stock was at the 290 strike price from the stock was at 299 for 109 was just a complete no-brainer and things like this model really really help the other thing i'd like to look at is i run a lot of simulations sometimes 300 different simulations between a range of prices where i believe the stock has been both downside and upside and where it could potentially go based on my analysis so i put in my range and i run random simulations based on volatility and i get a whole series of prices put and call option prices and i use this tool as well to create an average so i know the range of which i want to play and i use this heavily when i actually trade options on tesla again another tool not everybody needs to use this but it's uh it gives me that added level of comfort again it helps me use a lot of data from my asymmetric bet so let's look at the result real quick so i bought at 17 and 44 cents jets bounced to 21 bucks based on the vaccine news which was available a week earlier i didn't expect it to happen so fast but there it was uh the volatility went through the roof i sold the march 22 22 calls for two dollars 19 cents and i sold my rights basically selling that call it means i sell my rights to sell the jets stock that i own at 22 now what's really interesting here is when i went into the trade say we were talking 100 years i had 10 contracts which was a thousand shares we just took 100 shares for simplicity i bought the stock at 17.44 times 100 is 1 744 half of it was margin so i only put down 872 dollars so my cash outlay is 872 to 872 dollars and i borrow 872 then the jets etf bounced on the vaccine news stock went to 21. i had 100 shares so the value of that was now 2 100 i was already up if i had no margin and just bought the equity straight it would have been a 20 gain just in two trading days which is in itself good but to show you the power of a covered call i felt 22 is a good price which is about a dollar out of the money so again the stock was at 21 i sold the 22 dollar calls for 2.19 i ran the numbers i calculated the pricing and it seemed like a very good deal in the marketplace so i brought in an additional 219 dollars so my cost basis now went down from 872 down to 652 dollars i still owe the 872 margins to bear that in mind so i will be settling this trade at 22 a share including paying the margin of 872 back so i make a net profit of 103 on my outlay of 652 ie i pull in 675 bucks i hope that is clear and i can as always share the actual models if anybody wants to see the other way the other question i typically get is okay what's the downside we see how you made profit but how could this whole trade go sideways well i bought it 17.44 cents i took in 2.19 from selling the covered call so my breakeven now is down to 15.25 and the one-year moving average of the stock is 19 bucks so we'd have to take something really bad for these this airline etf to go belly up and that could still happen all of these airlines could file for bankruptcy and i expect some of the may in the near future but that's why i want to get out of this now i do expect some turbulence excuse the pun in the market as we go forward but using this little chart here you can see the green line is the actual profit line and zero is exactly at fifteen dollars and twenty five cents so if the etf goes all the way to twelve bucks i lose about 270 dollars per contract conclusion cover calls are great for passive income you can get 5 to 10x your normal stock returns using covered calls as compared to buying the stock you get downside protection for example the stock could tank 20 and you're still at break even but you do cap your upside so imagine buying 100 shares of tesla at 200 and then you sell the 250 call and tesla goes to 4 000 a share that's a very sad situation so there is other strategies if something does bounce and becomes very positive you can actually do a roll up or sometimes it pays to actually just buy your callback that you sold short and you can do these trades in both flat and bullish market conditions but you need to do your risk management quant and your research very important gotta do your homework before you go in you got to have that thesis you got to have the discipline you've got to have the numbers the model the technical analysis the knowledge of macro and micro before you jump in hope this was helpful first in the series please give me feedback let me know if it's too basic too complex or just about right and i'll always do these cases with real live trades that i do to make it easier for people to understand and again share your ideas very interested now in the mining stocks i know a lot of you are as well very interested in the bitcoin etf when that comes out we'll event will soon afterwards get options on that and that'll be a wonderful time to be able to sell against existing positions remember the scammers i'm the black bubble ignore everybody else thanks all if you like this as well hit the bell like and subscribe

Channel: InvestAnswers

Views: 55,524

Keywords: options 101, options trading made easy, covered calls for beginners, asymmetric bets, Asymmetric Bets!, 100% returns, bitcoin etf, etf trading, options strategies

Id: d7fSRzChSpk

Length: 19min 24sec (1164 seconds)

Published: Sun Jan 24 2021