How To Trade Options On Robinhood (Covered Calls Explained)

what's up guys welcome back today I'm going to show you how you can use trading options and covered calls to make passive income in your portfolio every single week last week I made a video about selling cash covered puts today is going to be the other side of that wheel strategy where we are going to use covered calls and collect premiums which are going to be ours to keep regardless of whether the option is exercised or not I'm gonna give you a really really simple breakdown I know trading options can seem confusing seem very difficult and options trades can look very very daunting but I promise at the end I'm gonna give you a very general basis and you're gonna see how you can make some passive income on top of your dividends and growth and anything else in your portfolio alright guys so right now we are inside my Robin Hood portfolio today is actually June 11th I made this options trading on June 8th but I wanted to jump in here today to show you a couple of things that happen after the option trade is put in so I'm going to show you exactly how to do it and I'm going to show you how what's happened since the week has gone by so if I scroll over wells-fargo here we remember from the cache covered puts that you need the collateral to purchase 100 shares if that option is exercising if you have no idea what I'm talking about go back and watch that video but in this option straight as well you also need collateral but in this case it's not in the form of cash it's in the form of the actual shares that you own so as you can see I own 100 shares of wealth Fargo so I'm gonna use this options trade and I'm going to use those shares as the collateral for this options trade so if I click into Wells Fargo there's something that I want to show you over the last week last week as you saw I put in a cash cupboard put and I think the strike price was at $27 here's a little downside of the put side which is kind of why I like the call side better I put it in for a $27 strike price as you remember and the price of the stock shot up to like 31 or 32 dollars in the middle of the week $33 so essentially what happened was I collected the premium on the cash cover put but I lost the potential for capital gains I lost the potential almost two or three hundred dollars here in capital gains which is why I'm more favorable of the cash covered call which I'm going to talk about in this video now to get to a hundred shares to initiate this trade you have a number of different options you can either build up your holdings over time buy some shares here and there until you get up to 100 you can just come out right and buy 100 shares right off the bat that's kind of what I did or you could sell that cache cover put and when it gets assigned you can then have a hundred shares because that's what you have to do when it gets assigned what I'm gonna do right here is I'm gonna go into trade Wells Fargo options and I'm gonna show you exactly what you're gonna see so this right here is called an options trading it's what you're going to see and this is actually a screenshot from when I did it back on the 8th so I can show you a real time what I was looking at when I decided to make this particular trade some basics that you need to know the strike price is going to be the price that the share is going to hit at expiration so as we see in the top right here we have something called an expiration date that's when this trade has to either be exercised or go worthless so when it hits a strike price you are either going to have to purchase the shares as in a cash cover put or in this case you'll have to sell off your hundred shares of collateral and hopefully collect some capital gains so at the time that I made this trade the share price for Wells Fargo was 32 96 I had a hundred shares of it and I could purchase one contract which is equal to 100 shares now what we see over here the real numbers that are really really important to you there's these have some meanings here in the middle but the ones on the end are the ones who really really need to be focused on so like I just said the one on the left is what I want to strike price to be now how did I choose that strike price well we can see that the average cost that I have my cost basis for Wells Fargo's thirty two dollars and sixty six cents so if this particular trade was to get exercised I want to make sure that I'm making money I would not make my strike price below thirty to sixty six because then I'd be selling off my shares for a loss so what I did was I picked $34 knowing that if it did get a sign I'd be okay with selling off my 100 shares you can only do this with a stock that you are okay selling off a hundred shares if you are married to stock and you can't sleep at night if this stock is on your portfolio then you should not do cash cover calls with this particular stock but for me I knew if it got assigned I would take that difference in capital gains I would make that money and then I'd go back and I'd either purchase a hundred more shares and repeat this process or I do the cash cover put that I talked about in the last video and I collect a premium on that speaking of premium these numbers over here represent the premium now this is what the buyer is willing to put up to make this trade with you now as you can see once again we're selling a call the buying side guys personally I'm not ready for that I still think it's gambling I know many people love to buy options as well but for me it's a you need too many things to happen essentially in short the buyer is hoping that Wells Fargo would have shot way above thirty four dollars to say like thirty seven well then I would had to sell them my one hundred shares for thirty four so they'd make three hundred dollars on that difference and to potentially make that difference they are willing to pay me 53.3 cents per share to make that happen now if it didn't happen and it goes worthless that buyer is just gonna lose that collateral and like I said that gamble did not pay off for them and as you head further and further away from the share price that premium they're gonna pay you it's gonna be less because the likelihood of this thing going to assignment and hitting the strike price is going to be less likely so now there's a couple of things that you have to choose if you were gonna do this one did you find a stock that you are willing to sell 100 shares at do you're gonna pick a strike price that's above your cost basis so if it does get assigned you are still gonna make money on the capital gains and how far away from the strike price are you willing to go I could have done it at 70 cents per share that I would have got $70 that's passive income right there and I say it's $70 because once again a contract is 100 shares so this is 70 cents times 100 I would have got 70 but I was I was okay it was climbing up it was being a little volatile I wasn't sure what it was gonna do so I picked this option right here I put in an order at 53 cents for a minimum credit this is passive income guys taxes ordinary income it's 53 dollars I get to put in my account and do whatever I wanted with it so a short time later guys this was filled like I said I got to keep 53 dollars now here are the scenarios that could have happened throughout the week and what I'm going to show you right now as of Thursday the share price could have went up to $34 and the buyer could have exercised that option to be honest they probably would have waited till thirty four dollars and fifty three cents because they want to make back the premium that they had to put up to make this trade so that's option one the share price goes up I have to sell off my shares to them for $34 downside if it does shoot up to $40 I lost the potential gains all the losses in this case are potential losses in capital gains so you're not actually going to lose anything but your 100 shares so if that were to happen we would take $34 and minus from 30 to 66 that would be my capital gains per share times 100 that money would be my pocket as well as the premium of 53 dollars passive income now here's option 2 which is what happened this week the share price could not reach $34 it could stay below that strike price now if it stays below that strike price until Friday the 12th when this expires it will expire worthless I will get my hundred shares to keep and I also keep the premium and then I could just repeat this process over and over again so the buyer would lose and I would win his or her premium that 53 dollars so if we look at the live Wells Fargo right now we see that it has douve once again it went up came down just as fast to $27 and 16 cents so there's a very very high likelihood that this is gonna get worthless and then I'm gonna go back to being able to do this again now will I let me show you something once again this cost basis because it's died way below my cost basis it might be hard for me to do a cache covered call next week let's just say it stayed right here like let's say it's Monday it's gone worthless I have all my shares if I wanted to look at this right now let's look at this so if I were to sell a call this is what's happening this week so I'll put it for next Friday if I want to go back up to that same $34 strike price you see I'd only get $6 right because now it's so far away from the share price so at 32 66 I would pretty much have to put it in 4 here so right now the most amount of money that I could really get is $9 once again $9 is free money I'll take it but that's what I would do I would not mess with any of these strike prices below my cost basis because if I was forced to sell off my shares I would take a capital gains loss which we don't want to do so what I have to hope for now is I have to hope for Wells Fargo to come back up into this 30 $31 range so that I can put in a strike price above my basis so that if I exercise and I have to sell them off I will still get capital gains and here's a live look at that once again like I said 53 dollars it's it's gonna go worthless unless something crazy happens tomorrow with Wells Fargo and then I'll get to make a decision on what I'm gonna do next now when it comes to which one I like better cash covered puts or covered calls well after last week and seeing the amount of potential gains that I lost I was kind of the fence then but I think I like the cash cover calls a little bit better and you could tell me which one has been more successful for you here's something that you need to note with cash covered calls as opposed to cash covered puts while you're inside this trading option the shares are still yours so during that week that I'm waiting I still get capital gains growth and also I would still collect dividends if the ex-dividend date came up with a cash cover put you don't own any shares so you get no capital gains and you get no dividends so that's why I kind of like the covered calls better so if you were thinking about doing one of these options I would say this build up your shares overall or put in a lump sum of money to be able to do the cash covered put I wouldn't be saving money over time to save up to be able to do the put because you're gonna miss things like dividends and like capital gains if this were to get exercised guys I probably just do a cache covered put really closer to strike price of what it was sold at so I essentially be selling it for 34 and then I buy them right back for 34 and keep that difference in premium it's all about the premium here but guys always expect your options to be exercised and hope that they go worthless and then you just keep the premium that's kind of the strategy behind the wheel we just want to keep the premiums and we don't necessarily want to have to buy or sell off our shares I hope that helped explain what a cover call was if it did guys please give the video a thumbs up if you need a channel consider subscribing right here I'll put that video that I posted last week if you got this far and you want to go back now and look at the cache cover puts down here's the playlist of my entire dividend investing portfolio over the last two months and until I see you guys on the next one stay positive work really really hard always be kind to other people hope you have yourself an amazing day

Channel: Brad Finn

Views: 112,376

Rating: 4.9478474 out of 5

Keywords: Financial Independence, Personal Finance, Money, Financial Freedom, Fire Movement, Brad Finn, The Finn Mindset, covered calls, covered call, robinhood options, trade options on robinhood, selling covered calls, selling covered calls wheel strategy, covered calls explained, options trading explained, covered calls simply explained, how to sell covered calls, covered calls for passive income, covered calls option strategy, how to trade options on robinhood

Id: bB4w01hL7Y0

Length: 12min 14sec (734 seconds)

Published: Thu Jun 11 2020