Board 8 > Stock Topic 25

(+) Yeah! (+)

Okay, I did it!

good guy Lopen

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I just picked something that seemed to have a good price premium that would offset your loss from buying the calls back and wouldn't lock you in the stock for too long.

As long as you keep the strike you're selling at >= $118 you can't lose money. Pick whatever duration you want at that point. You wanna hold through May 21? Go for it. Sell 9x120s and make $815 x 9. It doesn't really matter. I just wouldn't recommend selling a duration of less than a week (not enough premium for the risk) or more than like 2 months (too long to stay in the stock, too much risk)

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So if it doesnt hit $118, I made free $1800?
And if it does, what happens?

If it does you basically break even on the stock and pocket the $1800 (less the loss on the $107 calls). You can lose money if the stock goes down.

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Sunroof posted...

So if it doesnt hit $118, I made free $1800?
And if it does, what happens?

If it does, you are forced to sell your shares at $118 unless you buy your contract back (which I would never do unless you "roll" like we just manually did).

Here's the thing though. Selling them for $118 gives you a profit of $0.26 per share, so you really don't care that much if you have to do it.

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Cool! Thanks a lot.

And once 4/1 comes and if it doesnt hit $118, I can set another covered call for $118 in a few weeks? And get another $1800 or so? And repeat forever until it hits $118?

Sunroof posted...

And once 4/1 comes and if it doesnt hit $118, I can set another covered call for $118 in a few weeks? And get another $1800 or so? And repeat forever until it hits $118?

What you can get might be more or less than $1800 depending on what the options market thinks the movement of the stock will be, but in principle, yes.

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I've shared these before but I recommend you watch these @Sunroof

Covered Calls: https://www.youtube.com/watch?v=jnTsQBJHMSk
Cash Secured Puts: https://www.youtube.com/watch?v=r_rKof8IdfU&t=1s
Wheeling (Optional): https://www.youtube.com/watch?v=siFsIleNTzk

It gives you a good overview of the process of wheeling. Mainly pay attention to the Covered Call video and the rolling section of the Cash Secured Puts video. (Rolling can also be done on covered calls which is what you did).

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Sweet! I will check out once I get off. It seems to me that there is really no reason to not set a covered call once you buy a stock....

That's the idea.

It only becomes problematic if it falls a lot. Then it becomes harder and harder for the $118+ calls to give any appreciable premium. At that point you would probably be best served to sit on the stock like a normal person until the $118s give you something nice. Though you could always sell calls for further out too.

For example I am in a similar position with FUBO right now. I have 400 FUBO shares at cost basis of $40. I could sell calls for 2 weeks out at $40 to gain $40 per call, which isn't the worst, but I'm actually being greedy and waiting for it to get closer to $40 before doing so so I can actually make good money on it.

So it really just depends in your faith in the stock. If your faith is minimal you can spam and make small bits but if your faith is higher you can wait till it gets closer to your break even point and sell then.

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Yea i've had to roll down a lot of my fubo puts but i've never once been worried i won't profit long term from them

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Colegreen_c12 posted...

I've shared these before but I recommend you watch these @Sunroof

Covered Calls: https://www.youtube.com/watch?v=jnTsQBJHMSk
Cash Secured Puts: https://www.youtube.com/watch?v=r_rKof8IdfU&t=1s
Wheeling (Optional): https://www.youtube.com/watch?v=siFsIleNTzk

It gives you a good overview of the process of wheeling. Mainly pay attention to the Covered Call video and the rolling section of the Cash Secured Puts video. (Rolling can also be done on covered calls which is what you did).

Clutch video! A bit confusing but I could keep up because Ive done it now.

Yea I haven't found a perfect intro for new beginners on the stuff but I feel like he does a fairly good job but you might need to watch it more than once.

Another good options intro thing is https://tastytrade.thinkific.com/courses/beginner-options-course although this one covers some stuff I don't think you need at first. Like spreads, naked options, advanced things. I personally just watch various videos from different people on a new concept so i both understand it well and get different opinions on it.

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Heres how I see it. Tell me if this is right.

- Contract = 100 shares of a stock
- Strike price = price you think the stock won't hit, but if it does then the option "strikes"
- Expiry Date = date you think strike price won't hit by

Things to keep in mind:
- Expiry dates are only on Fridays. Depending on the stock, it can be every Friday or maybe one Friday a month
- The larger the "gamble" (i.e., far away expiry date + strike price that is close to current price) the more premium you'll get, whereas the smaller the "gamble" (i.e., very close expiry date + strike price that is far from current price) the less premium you'll get

Just did a DIS call for two weeks. Made $100 off it. Cant believe I havent been doing this the entire time.

How come it shows that I have a negative balance?

That is a good summary of the perspective for selling calls.

If you never buy your call back and never sell it for less than your entry price you will never not make money unless the stock goes down (which is a risk of your usual paradigm anyway)

It seems like a much stronger way to chip away profits like you tend to do

The downside is you don't get profits for monster runs but you always sell before those come anyway so for your style you should end up making a lot more doing this.

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Sunroof posted...

- The larger the "gamble" (i.e., far away expiry date + strike price that is close to current price) the more premium you'll get, whereas the smaller the "gamble" (i.e., very close expiry date + strike price that is far from current price) the less premium you'll get

That's all generally accurate. Just realize that there are other factors that determine how large a gamble is (ie the volitality of a stock).

So stocks that move a lot (think like a gme where it can spike and drop huge in a day) will warrant much higher premiums for the same distance and time to strike than something that is more stable like a Microsoft or a Disney.

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Sunroof posted...

How come it shows that I have a negative balance?

Because the value of the contract you sold is negative to your account that is to say to be freed of the contract you have to buy it back.

You got cash up front so your net account value isn't going to go down from this but rather stay even from this. It could show that the negative value is even higher over time but that will be offset by the value of your held shares going up.

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Okay so its nothing to be alarmed over.

I want to emphasize to Moonroof - you can lose money selling covered calls if the stock goes down. You cannot stop your losses by selling the stock without also either buying back the call or going into a naked short position, which is equivalent to a short stock position in terms of its unlimited liability.

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I always get to keep the premium though. If the stock keeps going down, I would have endured that loss anyway.

But you wouldn't have - you would have sold for a loss very early on with one of your stop losses.

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I also want to emphasize that yes but you can lose money if the stock goes down by just sitting on shares too

And if the stock goes down, the price of the covered call goes down with it, so it's easier to get out of your obligation if you really want to panic sell for example if PTON were to drop to $100 the price of those calls he's sold would probably be much lower than the $203 he got for them initially, so he still made some money on the covered calls while still not strictly speaking preventing him from panic selling.

Yes it's important to only do this with stocks you trust won't go down, but that's true of any stock. CCs lower risk, not increase it. It's easy to call options some sort of boogeyman but in the case of CCs they're really not if you follow some hard rules when selling them.

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Sunroof posted...

I always get to keep the premium though. If the stock keeps going down, I would have endured that loss anyway.

If you buy $100 and sell a CC for $110 making $1 a share

Say the stock drops to $90 and you want to sell for some reason (you probably shouldn't have bought anyways).

Your game plan at this point should be:
-Buy back the CC (You will likely buy it back for less than you sold it for. Let's say $0.25 instead of $1)
-Then sell the shares (You can do both steps at once in some brokers)

At this point you lost $9.25 a share. Your still better off than if you just owned the shares and lost $10 though. I highly discourage selling the shares before buying back the CC though

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It's not covered calls that's risky, it's the mindset of "this trade can't lose" that's super risky. If you are thinking something is "free money" you're probably missing something. There's almost always a tradeoff.

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It seems like cheating that you can buy back the option on the day of the expiry date.

red sox 777 posted...

It's not covered calls that's risky, it's the mindset of "this trade can't lose" that's super risky. If you are thinking something is "free money" you're probably missing something. There's almost always a tradeoff.

The losing trade is owning the shares, not selling the CC. It's pretty much accurate to say selling a CC can't lose (if you choose a strike and expiry that fall into certain low risk windows) it's just that it shouldn't make you overconfident about the underlying shares you own.

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So what happens when you choose a strike price that is under the current price?

Lopen posted...

The losing trade is owning the shares, not selling the CC. It's pretty much accurate to say selling a CC can't lose (if you choose a strike and expiry that fall into certain low risk windows) it's just that it shouldn't make you overconfident about the underlying shares you own.

I'm talking about the whole trade (long shares + short call), which can both make money and lose money. If you are talking about only the short call, then of course that can lose. It loses a lot of money if the share price moves substantially above the strike price. If you are going to ignore the losses from the long shares part of the trade when the stock moves down, then it's only fair to ignore the gains from that part of the trade when the stock moves up.

Practically speaking, I just don't want Moonroof to think he can buy Peloton or whatever and hold for a year and sell calls and literally have no risk. He does have risk from holding the shares, which is only slightly reduced by the calls.

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Facebook +4.5% WHY THE FUCK

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red sox 777 posted...

It loses a lot of money if the share price moves substantially above the strike price

It loses profits but is still a win overall. You can't lose. You only win less

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Sunroof posted...

So what happens when you choose a strike price that is under the current price?

You get the premium up front

They can take your shares for the strike price at any time before the expiration. If the price at expiration is at the strike or below it's pretty much 100% your shares automatically assigned.

It becomes increasingly unlikely that the contract expires worthless because your stock would need to go down for that to happen. It's silly to sell these imo because if you think your stock is going to go down why own the shares to begin with.

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Lopen posted...

It loses profits but is still a win overall. You can't lose. You only win less

Again, if you are talking about the whole trade, then it loses when the stock goes down by enough to lose more than the option premium you received. You can't have it both ways and talk about only the call when the stock goes down but talk about the whole trade when it goes up.

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red sox 777 posted...

Again, if you are talking about the whole trade, then it loses when the stock goes down by enough to lose more than the option premium you received. You can't have it both ways and talk about only the call when the stock goes down but talk about the whole trade when it goes up.

I'm talking about relative gains/losses to just owning the stock.

If you sell the CC and the stock goes down, you don't actually lose money vs just owning the shares. You lost money either way. You probably lose less by selling the CC cause if you panic sell you keep part of your premium received and if you were planning on holding through it you get the whole premium which is more than you'd have if you held through the fall and didn't sell the CC

If you sell the CC and the stock goes up LOTS you still make money, just less money than you would if you hadn't sold the CC.

I guess what I'm saying is I don't consider "lost profits" a risk.

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Sunroof posted...

So what happens when you choose a strike price that is under the current price?

You'll get a higher premium but it usually won't make up the difference in price of just.... selling the share.

IE you could sell calls at the current price or above for $1, or sell calls a $3 below the current price for $2.50

But why? You could just sell at the current price.... If the stock gets assigned at that low stock price it won't make much sense. Which it would unless the stock price drop and if you were expecting the price to drop why didn't you just sell your shares?

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The only reason i can see selling an itm CC is if you want to exit on a certain date. Like if you are 1 week away from long term gains and want to lock in those profits it might make sense but you need to hope you don't get assigned early

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Lets say on 3/19 a stock is at $8 when you set expiry date of 4/1 and strike price of $10. If the stock hits $11 on 3/20, does the strike hit? Or must it wait until 4/1?
I guess what Im asking is whether the expiry date is the deadline and the strike can hit any point up to that date, or is it basically judgment day?

Lopen posted...

I'm talking about relative gains/losses to just owning the stock.

If you sell the CC and the stock goes down, you don't actually lose money vs just owning the shares. You lost money either way. You probably lose less by selling the CC cause if you panic sell you keep part of your premium received and if you were planning on holding through it you get the whole premium which is more than you'd have if you held through the fall and didn't sell the CC

If you sell the CC and the stock goes up LOTS you still make money, just less money than you would if you hadn't sold the CC.

I guess what I'm saying is I don't consider "lost profits" a risk.

Yes, the risk of selling covered calls relative to just owning the stock is lost profits. Precisely that. I do consider that a major downside. But whether or not you do, that's a different thing from the risk of the whole position (long stock + short call).

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Is there a way to auto sell a stock once it hits a certain price above what you bought it at, like the opposite of a stop sell?

Oh I asked the same thing a few months ago when I first learned about covered calls up in here!

Someone *can* exercise a call early if they want by calling their broker and have them go through the process. It isn't required to wait the full duration. But typically it will just be held until the expiry, possibly sold between multiple in the meantime, and it'll only get exercised if its in the money at that expiry date. My understanding is that this happens at end of day but that might be wrong (My broker tells me they'll do it at close, but maybe they are doing it in the background during the day and just apply it to me at end of day)

I think generally you don't expect that it will be exercised early, but don't get completely surprised pikachu face if it does happen some day.

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Sunroof posted...

Lets say on 3/19 a stock is at $8 when you set expiry date of 4/1 and strike price of $10. If the stock hits $11 on 3/20, does the strike hit? Or must it wait until 4/1?
I guess what Im asking is whether the expiry date is the deadline and the strike can hit any point up to that date, or is it basically judgment day?

With American options the holder can exercise at any time but in practice they are rarely exercised before the last day. That's because until the very end, the market price of the option is almost always going to be higher than the value of exercising, so the call holder would rather sell it than exercise it.

I remember from school that there is a mathematical proof showing the very counterintuitive result that given some fairly reasonable assumptions, the difference between American options and European options (that American options can be exercised at any time up to the expiry rather than only at time of expiry) does not actually impact the price of the options. Because no one will exercise before expiry.

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Sunroof posted...

Is there a way to auto sell a stock once it hits a certain price above what you bought it at, like the opposite of a stop sell?

You just set a normal limit price to sell with no expiration.

You've been using limit prices since we warned you to stop using market buys, right?


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Sunroof posted...

Is there a way to auto sell a stock once it hits a certain price above what you bought it at, like the opposite of a stop sell?

A limit sell order

red sox 777 posted...

With American options the holder can exercise at any time but in practice they are rarely exercised before the last day. That's because until the very end, the market price of the option is almost always going to be higher than the value of exercising, so the call holder would rather sell it than exercise it.

I remember from school that there is a mathematical proof showing the very counterintuitive result that given some fairly reasonable assumptions, the difference between American options and European options (that American options can be exercised at any time up to the expiry rather than only at time of expiry) does not actually impact the price of the options. Because no one will exercise before expiry.

Yep, The only real reason to ever exercise early is to get a dividend (outside of extreme cases like being locked out of buying shares).

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Wow. I learned so much today between selling covered calls and limit sells. Now my odds of selling too early go from 80% to 70%.

red sox 777 posted...

Yes, the risk of selling covered calls relative to just owning the stock is lost profits. Precisely that. I do consider that a major downside. But whether or not you do, that's a different thing from the risk of the whole position (long stock + short call).

My point is all risk to you of losing money is introduced by the long stock

Short call reduces risk from your long stock. It itself isn't introducing any extra risk in terms of losses.

If you want to think that you're good enough at timing the market and knowing when to sell that selling a covered call is going to on average lose you profits vs selling somewhat conservative covered calls (I highly doubt anyone in this topic is good enough at that), more power to you, but for most people that wouldn't be the case.

Now in the case of moonroof who on the regular sells stocks for like 0.5% gain, I think the risk of "lost profits" is pretty much a non-factor. He basically gets all the downside from selling ATM covered calls without the profit premium as is. May as well gain some actual decent gains from selling for pennies through contract premiums.

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Lopen posted...

My point is all risk to you of losing money is introduced by the long stock

Short call reduces risk from your long stock. It itself isn't introducing any extra risk in terms of losses.

If you want to think that you're good enough at timing the market and knowing when to sell that selling a covered call is going to on average lose you profits vs selling somewhat conservative covered calls (I highly doubt anyone in this topic is good enough at that), more power to you, but for most people that wouldn't be the case.

Now in the case of moonroof who on the regular sells stocks for like 0.5% gain, I think the risk of "lost profits" is pretty much a non-factor. He basically gets all the downside from selling ATM covered calls without the profit premium as is. May as well gain some actual decent gains from selling for pennies through contract premiums.

Generally speaking, I agree. Although it is true that most of Moonroof's profits for the last year come from one AMC trade where he got a pretty big percentage gain in after hours.....which would probably have been mostly wiped out if he had sold anything but deep deep OTM calls on it.

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