The ONLY downside of covered call writing is giving up some upside in the stock and incurring short term capital gains (on the premium). That is it. If your stock tanks, the call is rendered useless. You buy it back for pennies and sell the stock. End of story. Covered call writing is a good strategy.
You seem like a nice guy, but your information is very misleading. You state that you lost all your money in a matter of 15 minutes, but what did it have to do with the calls? It sounds like you had poor stock selection which has zero to do with covered call writing. To be honest, the call helped you because it lowered your cost basis on a bad trade. The fact of the matter is that covered call writing has no more downside then someone who simply owns the same stock and doesn't sell a call.
"I lost my shirt, then rolled-up my shirtsleeves..." at about 2:35. You might want to have one of your students proofread your script, and then hold some cue cards for you. But, on the other hand, thanks for the info.
if you got a $3 premium on a $17 stock my guess is that this was a high volatility stock that you bought for the premium and not because you really wanted to own the stock....
if you got a $3 premium on a $17 stock my guess is that this was a high volatility stock that you bought for the premium and not because you really wanted to own the stock....
It seems to me that this guy thinks that limiting loss is the way to go. Yes, a protective put does limit your downside, but your putting more money up. Why not do a collar if you want to do a protective put? At least at that point, you are offsetting your put cost by selling a call?
Using a collar limits your upside. In the last twelve months, I played ALTR twice; once the stock went up 17.3% and the other time it went down 21.8%. But I made money! Here's why: on the way up when ALTR gained 17.3%, I got 12% net gain from my position. Buying a put cost me a little of the profit. But it would have been a single digit profit if I had used a collar. Then, when the stock went down 21.8%, my loss was only 5.6% because of the put. I made a net profit while stock lost money overall
This guy is an idiot, you have to be happy with the stock you are writing calls. Of course there are many option strategies. Just because the married put is good docent make the covered call bad.
SIgh... if you are happy with the stock, why write a call? You get called out if you were right. If you truly believe in a stock and want to see it soar, by selling a call all you do is limit your wins if you are right. And if you are wrong, shazam! You get to keep the losing stock. Hmmm... not so idiotic to make observations of truth, friend.
@bearbite3, They don't have to be! There is plenty of free and fee-based instruction available. Steer clear of those promising huge returns for little or nothing tho.
I just did my first "covered call" today. And am scared I made a mistake. I sold it deep in the money, i guess. $4.60 stock. Sold a call at strike of $3.50. Don't know if this was smart or stupid but Monday I will be buying back my call either way. Time decay will at least be on my side as long as the stock doesn't "gap up." Either way, I just bout 100 shares and 1 contract so I can limit my risk and know how the game works before I start to do bigger option plays.
I am sorry to hear of the outcome with this individual.
Why did he not buy the calls back instead of delivering the shares. There are exit strategies to options that must be learned. Selling covered calls is safer than owning a stock outright if done properly.
Covered call selling can be risky, and yes, those who pick the market direction at least somewhat are going to win, but the idea is to make money with less risk, not necessarily to beat the market. Covered calls and puts can work with risky stocks, because the monthly premiums are good enough to cover the decline in value of the long term puts. Just start small and learn how to hedge!
stick to the day jobs, or learn your collars and puts... covered calls are best written near expiration and only after you already have a couple points of profit on your position
Why can't you just place a protective stop instead? The put will be very expensive, especially for beginners with too little money to cover the comission fees. If the puts maturity is high, and your stock gets called away, you still have to buy back the stock in order to get income out of it. At this time the stock will obviously trade at a mutch higher price than the puts exercise price. So your next position isn't really that covered. Or can you convince me to the contrary?
I have a two word reply to the protective stop argument: FLSSH CRASH. On May 6, there was widespread panic and slippage of these stop orders. Piles of folks got hurt because a stop order is nothing more or less than a market order that gets triggered when price is hit - but there is no guarantee that you will be filled AT the 'stop' price. That's the market in general... the problem is worse with individual stocks in which bad news might cause an overnight gap, blowing thru a 'protective' stop.
Ok, thats a good point, completely forgot about gaps. I shall consider this in my trading plan. I haven't begun trading yet. I will educate myself a lot before I begin. So a covered call strategy is probably safer with an ETF. I don't mind the lower premium for a less volatile asset. I am shooting for a 2-3 % monthly cash flow.
Also... I have no idea what you mean about stock getting called away. Buying a put gives you privileges, NOT obligations. There is never any danger of a stock being 'called away' if you own it and a put option at the same time. You only have a legal and binding contract that GUARANTEES your sell price... but you are never obligated to sell at this price if your price rises above it.
I might have misunderstood. I assumed that we at some point write a covered call to generate income. Buying gives privilages, at a cost. Selling away privilages gives you income. At some point, assuming no free lunch, I have to get rid of something in order to generate income. Buing a call in order to leverage my position, will turn to a loss in sideways moving markets. Or should you just wait for dividends?
GOOD question. I have ten separate 'Income Methods' that I use to generate income and are done nested WITHIN a trade like this. One of those methods you have already mentioned: Dividend capturing. Here's another idea... selling a bear call spread at a higher strike than the put's strike price. In many cases this results in a credit that CAN'T go against you... because for the bear call spread to turn into a liability, the stock has to go up... and you OWN it. Come to my free Webinar Tue or Thu !
ANY time you buy puts against your shares, you are essentially limiting your profit potential. It's true you insure yourself against a huge loss here, you also make the sacrifice of requiring the stock to rise THAT MUCH MORE just to cover the money spent on the puts. And when you sell calls on top of this to "bulletproof" the entire thing, you're once again taking a potential risk of limiting your profit even more, in the event that the underlying rises and your shares end up being called away.
@J4Video, I have documented better returns by using married puts than covered calls. Recently a covered call seller wrote in with a sixteen day, 7.9% return on her covered call trade. Impressive until you consider that entering the same day with a married put done according to my principles, you would have made nearly twice as much.
@J4Video Buying a put to protect your shares doesn't limit your profit potentials. You can still make unlimited profits as the stock can theoretically go up infinitely. Yes, with put protection you are sacrificing some initial profits and raising the price that your stocks must rise to in order to be profitable, but this is the price to pay to know that if the stock falls it is essentially someone else's problem.
Writing calls against your shares essentially is the opposite risk scenario.
whats why you dont buy stocks thats are small cap and heathcare stock for covered calls. Buy ones like Walmart, Coca Cola, IBM est... and you wont see a 50% drop in 15 minutes
It doesn't begin with a loss... A few seconds after buying a stock and a put you may liquidate both for about the same price. It's only if you 1) wait until expiry and 2) the stock goes down, 3) you bought the incorrect strike and 4) you did NOT employ one or more of the ten Income Methods during the hold time... that what you say might be true. Watch the whole thing next time! ;-)
Well... I learned from the experience. And, fact is that married puts are done everyday, yes. But, the stock does NOT need to go over the option premium for you to make money. I prove this every week.
Something better than both these strategies would be a conservative covered combination (spread); this means selling an ITM call and a very far OTM put. This gives you an increased downside protection and profit potential.
This video is called "The trouble with covered calls" but here's the trouble with Married puts: you need to buy an option which is an extra cost besides bying the stock itself and the stock actually has to MOVE UP for you to START making a profit. I've been writing deep-in-the-money covered calls now for several months and I have averaged 10% per month on a 2 to 1 margin account.
I have been trading for several months. I recently closed my positions for the month of June and my account is at roughly 250k from a starting amount of 160k in february all on this strategy; to tell you the truth, I am barely trying here.
The trend is your friend... until the END when it BENDS.
;-)
Just trying to caution you. The strategy you are using is good... for a time. But it sounds like you are fully invested and using margin to boot. Trading covered calls will catch up to you. Shoot, ANY strategy will catch up to you if you become too cocky. The market takes no prisoners.
hi, i am very curious as to what kind of stocks you are selling covered calls on? 10% per month return with 'deep in the money' calls seems like risky business to me. the video is meant to save ur backside with put protection and the cost of the put can be offset.
I was buying Bank of America, Citigroup, JPMorgan, etc. Anything that had 5% or more return per month (roughly 10% on my margin account) and a downside protection of 20% or more. I have had over 95% accuracy since february doing this. My account has gone from 160k to 280k as of today. If you would like, I can show you all my transactions.
Mind you that the last few months has been less profitable because of the decrease in volatility thus a decrease in option premiums. On the other hand, it is still as easy as it was to make a profit.
interesting...imagine if you just did the married put strategy on these, you would have really made big money without capping your gains with the sold calls. fact is, stocks have been rallying higher with less and less volume, sooner or later, the market will certainly turn, be ready.
You can lose a lot of money on covered calls. Yes, you should invest n large companies. Like Lehman, Flour, Citibank, Apple, Worldcom, Enron....oh wait. Hey how are those Nutrisystems and Men's Warehouse calls going? Fab huh?
Obviously you didn't view this video, just posted a comment. I show the dark side of covered call selling in this series. I also show the solution to the two biggest problems.
That was my point. I'm agreeing with you. Too much sarcasm on my part I guess. Sorry.
I did view the video, and liked it. I'm going to look into your ideas a bit further. I was responding to all the people who were basically saying that you couldn't lose money in covered calls if you used them correctly. Well, some of the techniques covered call boosters use are laughable. I was listing a few stocks where, regardless of technique, you were killed in covered calls.
The mistake of this video is that he doesn't understand the strategy of covered calls. Putting your life savings into a single stock is a bad idea to begin with. Covered Calls work best on stocks for very large companies that have traded in a very narrow window for a long period. It should never be used on a potentially volatile stock. He lost his money because of a bad stock choice, not because of covered calls.
Covered call writing is mainly a bull market stratergy. If you had bought the stock sold the calls at the beginning of the month harvesting monthly premium and then insured your position by buying a leap put option at or near the money you wouldn't have lost your life savings. Buying the put eats into your potential profits slightly but gives you piece of mind. If the stock falls of a cliff your covered. You are angry at your loss but you could have easily been safe and still made money.
A few points: selling covered calls does not eliminate market risk. If your stock drops in price and you wish to exit the trade, just buy back your calls, and sell your stock. This approach is more conservative than owning a stock outright. Also, you can sell deep in the money calls, which insures you to the downside and just receive the time value of the option as income.
Covered calls do not eliminate market risk, but they are more "conservative" because selling a covered call does generate income. Also, the writer gets to choose the strike price in which to liquidate the stock, not they buyer. Covered calls don't expose you to anymore risk than owning a stock. If your stock drops and you think it will continue to drop, just buy back your covered call and then sell your stock. You are not obligated to deliver the shares once your position is closed.
Yes, you can lose money on covered calls. However, you need to educate yourself on the stock! Covered calls work best in a flat market, I feel bad for this guy, but it seems he put his entire life savings in one stock, bad move, especially if you know nothing about fundamental analysis!!
I love the CC's and never didn't make a consistant 22% Very conservative investment vehicle and can be beneficial to a less agressive trader. Want some fun... Trade Forex. Be good and good luck!
The ONLY downside of covered call writing is giving up some upside in the stock and incurring short term capital gains (on the premium). That is it. If your stock tanks, the call is rendered useless. You buy it back for pennies and sell the stock. End of story. Covered call writing is a good strategy.
dfox3526 3 months ago
You seem like a nice guy, but your information is very misleading. You state that you lost all your money in a matter of 15 minutes, but what did it have to do with the calls? It sounds like you had poor stock selection which has zero to do with covered call writing. To be honest, the call helped you because it lowered your cost basis on a bad trade. The fact of the matter is that covered call writing has no more downside then someone who simply owns the same stock and doesn't sell a call.
dfox3526 3 months ago
"I lost my shirt, then rolled-up my shirtsleeves..." at about 2:35. You might want to have one of your students proofread your script, and then hold some cue cards for you. But, on the other hand, thanks for the info.
joeboomer69 4 months ago
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if you got a $3 premium on a $17 stock my guess is that this was a high volatility stock that you bought for the premium and not because you really wanted to own the stock....
psychedelicslide 4 months ago
if you got a $3 premium on a $17 stock my guess is that this was a high volatility stock that you bought for the premium and not because you really wanted to own the stock....
psychedelicslide 4 months ago
It seems to me that this guy thinks that limiting loss is the way to go. Yes, a protective put does limit your downside, but your putting more money up. Why not do a collar if you want to do a protective put? At least at that point, you are offsetting your put cost by selling a call?
MrCFO1986 5 months ago
Using a collar limits your upside. In the last twelve months, I played ALTR twice; once the stock went up 17.3% and the other time it went down 21.8%. But I made money! Here's why: on the way up when ALTR gained 17.3%, I got 12% net gain from my position. Buying a put cost me a little of the profit. But it would have been a single digit profit if I had used a collar. Then, when the stock went down 21.8%, my loss was only 5.6% because of the put. I made a net profit while stock lost money overall
freedomschool 5 months ago
This guy is an idiot, you have to be happy with the stock you are writing calls. Of course there are many option strategies. Just because the married put is good docent make the covered call bad.
khalilabualeena 1 year ago
SIgh... if you are happy with the stock, why write a call? You get called out if you were right. If you truly believe in a stock and want to see it soar, by selling a call all you do is limit your wins if you are right. And if you are wrong, shazam! You get to keep the losing stock. Hmmm... not so idiotic to make observations of truth, friend.
5stepsto5figures 1 year ago
@5stepsto5figures
Different option stratergies are used in different market conditions...
Covered call is a moderately bullish stratergy.. Forget it.....
a bad carpenter always blames his tools...
khalilabualeena 1 year ago
@khalilabualeena dude hes not an idiot hes my sensei
bobbut1234 3 months ago in playlist More videos from freedomschool
call and puts are to confusing for some1 trying to learn
bearbite3 1 year ago
@bearbite3, They don't have to be! There is plenty of free and fee-based instruction available. Steer clear of those promising huge returns for little or nothing tho.
Kurt
5stepsto5figures 1 year ago
I just did my first "covered call" today. And am scared I made a mistake. I sold it deep in the money, i guess. $4.60 stock. Sold a call at strike of $3.50. Don't know if this was smart or stupid but Monday I will be buying back my call either way. Time decay will at least be on my side as long as the stock doesn't "gap up." Either way, I just bout 100 shares and 1 contract so I can limit my risk and know how the game works before I start to do bigger option plays.
Cobrauh 1 year ago
I am sorry to hear of the outcome with this individual.
Why did he not buy the calls back instead of delivering the shares. There are exit strategies to options that must be learned. Selling covered calls is safer than owning a stock outright if done properly.
Ishladeedeesh 1 year ago
Covered call selling can be risky, and yes, those who pick the market direction at least somewhat are going to win, but the idea is to make money with less risk, not necessarily to beat the market. Covered calls and puts can work with risky stocks, because the monthly premiums are good enough to cover the decline in value of the long term puts. Just start small and learn how to hedge!
ttm0753 1 year ago
stick to the day jobs, or learn your collars and puts... covered calls are best written near expiration and only after you already have a couple points of profit on your position
dnichols24 1 year ago
stick to martial arts dude
dnichols24 1 year ago
Why can't you just place a protective stop instead? The put will be very expensive, especially for beginners with too little money to cover the comission fees. If the puts maturity is high, and your stock gets called away, you still have to buy back the stock in order to get income out of it. At this time the stock will obviously trade at a mutch higher price than the puts exercise price. So your next position isn't really that covered. Or can you convince me to the contrary?
Jarezev 1 year ago
I have a two word reply to the protective stop argument: FLSSH CRASH. On May 6, there was widespread panic and slippage of these stop orders. Piles of folks got hurt because a stop order is nothing more or less than a market order that gets triggered when price is hit - but there is no guarantee that you will be filled AT the 'stop' price. That's the market in general... the problem is worse with individual stocks in which bad news might cause an overnight gap, blowing thru a 'protective' stop.
freedomschool 1 year ago
Ok, thats a good point, completely forgot about gaps. I shall consider this in my trading plan. I haven't begun trading yet. I will educate myself a lot before I begin. So a covered call strategy is probably safer with an ETF. I don't mind the lower premium for a less volatile asset. I am shooting for a 2-3 % monthly cash flow.
Jarezev 1 year ago
Also... I have no idea what you mean about stock getting called away. Buying a put gives you privileges, NOT obligations. There is never any danger of a stock being 'called away' if you own it and a put option at the same time. You only have a legal and binding contract that GUARANTEES your sell price... but you are never obligated to sell at this price if your price rises above it.
freedomschool 1 year ago
I might have misunderstood. I assumed that we at some point write a covered call to generate income. Buying gives privilages, at a cost. Selling away privilages gives you income. At some point, assuming no free lunch, I have to get rid of something in order to generate income. Buing a call in order to leverage my position, will turn to a loss in sideways moving markets. Or should you just wait for dividends?
Jarezev 1 year ago
GOOD question. I have ten separate 'Income Methods' that I use to generate income and are done nested WITHIN a trade like this. One of those methods you have already mentioned: Dividend capturing. Here's another idea... selling a bear call spread at a higher strike than the put's strike price. In many cases this results in a credit that CAN'T go against you... because for the bear call spread to turn into a liability, the stock has to go up... and you OWN it. Come to my free Webinar Tue or Thu !
freedomschool 1 year ago
ANY time you buy puts against your shares, you are essentially limiting your profit potential. It's true you insure yourself against a huge loss here, you also make the sacrifice of requiring the stock to rise THAT MUCH MORE just to cover the money spent on the puts. And when you sell calls on top of this to "bulletproof" the entire thing, you're once again taking a potential risk of limiting your profit even more, in the event that the underlying rises and your shares end up being called away.
J4Video 2 years ago
@J4Video, I have documented better returns by using married puts than covered calls. Recently a covered call seller wrote in with a sixteen day, 7.9% return on her covered call trade. Impressive until you consider that entering the same day with a married put done according to my principles, you would have made nearly twice as much.
freedomschool 1 year ago
@J4Video Buying a put to protect your shares doesn't limit your profit potentials. You can still make unlimited profits as the stock can theoretically go up infinitely. Yes, with put protection you are sacrificing some initial profits and raising the price that your stocks must rise to in order to be profitable, but this is the price to pay to know that if the stock falls it is essentially someone else's problem.
Writing calls against your shares essentially is the opposite risk scenario.
grperez 1 year ago
I got a kick out of this. haha
Thanks for the tips!
sotrder 2 years ago
whats why you dont buy stocks thats are small cap and heathcare stock for covered calls. Buy ones like Walmart, Coca Cola, IBM est... and you wont see a 50% drop in 15 minutes
lti12 2 years ago
Yes, wade cook certainly did popularize them.
he caused a lot of people to lose a lot of money in his suicidal tactics and seminars.
Hedging with put as you speak is the best way I know of to at least get your monies back. .
robwiley01 2 years ago
It doesn't begin with a loss... A few seconds after buying a stock and a put you may liquidate both for about the same price. It's only if you 1) wait until expiry and 2) the stock goes down, 3) you bought the incorrect strike and 4) you did NOT employ one or more of the ten Income Methods during the hold time... that what you say might be true. Watch the whole thing next time! ;-)
freedomschool 2 years ago
Some puts on sparsely traded stocks have pretty wide bid/ask spreads so I donno if you can pull out so quickly. An example would be KEY.
proxicate 2 years ago
That's why it's "key" to trade more liquid issues. ;-)
freedomschool 2 years ago
Comment removed
BrnGrlinHeels 2 years ago
Well... I learned from the experience. And, fact is that married puts are done everyday, yes. But, the stock does NOT need to go over the option premium for you to make money. I prove this every week.
freedomschool 2 years ago
Something better than both these strategies would be a conservative covered combination (spread); this means selling an ITM call and a very far OTM put. This gives you an increased downside protection and profit potential.
alexampeg 2 years ago
This video is called "The trouble with covered calls" but here's the trouble with Married puts: you need to buy an option which is an extra cost besides bying the stock itself and the stock actually has to MOVE UP for you to START making a profit. I've been writing deep-in-the-money covered calls now for several months and I have averaged 10% per month on a 2 to 1 margin account.
alexampeg 2 years ago
2 to 1 margin will kill you dead will a down move. Be prepared; whoever is teaching you how to trade is going to get you in trouble sooner or later.
freedomschool 2 years ago
I have been trading for several months. I recently closed my positions for the month of June and my account is at roughly 250k from a starting amount of 160k in february all on this strategy; to tell you the truth, I am barely trying here.
alexampeg 2 years ago
The trend is your friend... until the END when it BENDS.
;-)
Just trying to caution you. The strategy you are using is good... for a time. But it sounds like you are fully invested and using margin to boot. Trading covered calls will catch up to you. Shoot, ANY strategy will catch up to you if you become too cocky. The market takes no prisoners.
freedomschool 2 years ago
hi, i am very curious as to what kind of stocks you are selling covered calls on? 10% per month return with 'deep in the money' calls seems like risky business to me. the video is meant to save ur backside with put protection and the cost of the put can be offset.
davecir123 2 years ago
I was buying Bank of America, Citigroup, JPMorgan, etc. Anything that had 5% or more return per month (roughly 10% on my margin account) and a downside protection of 20% or more. I have had over 95% accuracy since february doing this. My account has gone from 160k to 280k as of today. If you would like, I can show you all my transactions.
alexampeg 2 years ago
Mind you that the last few months has been less profitable because of the decrease in volatility thus a decrease in option premiums. On the other hand, it is still as easy as it was to make a profit.
alexampeg 2 years ago
interesting...imagine if you just did the married put strategy on these, you would have really made big money without capping your gains with the sold calls. fact is, stocks have been rallying higher with less and less volume, sooner or later, the market will certainly turn, be ready.
davecir123 2 years ago
You can lose a lot of money on covered calls. Yes, you should invest n large companies. Like Lehman, Flour, Citibank, Apple, Worldcom, Enron....oh wait. Hey how are those Nutrisystems and Men's Warehouse calls going? Fab huh?
rudyhassen 3 years ago
Obviously you didn't view this video, just posted a comment. I show the dark side of covered call selling in this series. I also show the solution to the two biggest problems.
freedomschool 3 years ago
That was my point. I'm agreeing with you. Too much sarcasm on my part I guess. Sorry.
I did view the video, and liked it. I'm going to look into your ideas a bit further. I was responding to all the people who were basically saying that you couldn't lose money in covered calls if you used them correctly. Well, some of the techniques covered call boosters use are laughable. I was listing a few stocks where, regardless of technique, you were killed in covered calls.
rudyhassen 3 years ago
:-) Ok got it Rudy. Check out the "holy" Grail of Trading and Bulletproof Your Portfolio videos. Lots of fun.
freedomschool 3 years ago
It does seem that you need in a company that you really believe will not take a dive on you, or if it does that you are prepared.
924142707 3 years ago
The mistake of this video is that he doesn't understand the strategy of covered calls. Putting your life savings into a single stock is a bad idea to begin with. Covered Calls work best on stocks for very large companies that have traded in a very narrow window for a long period. It should never be used on a potentially volatile stock. He lost his money because of a bad stock choice, not because of covered calls.
bwethington 3 years ago
Covered call writing is mainly a bull market stratergy. If you had bought the stock sold the calls at the beginning of the month harvesting monthly premium and then insured your position by buying a leap put option at or near the money you wouldn't have lost your life savings. Buying the put eats into your potential profits slightly but gives you piece of mind. If the stock falls of a cliff your covered. You are angry at your loss but you could have easily been safe and still made money.
vendor72 3 years ago
covered calls sound like trouble
longtang1234 4 years ago
A few points: selling covered calls does not eliminate market risk. If your stock drops in price and you wish to exit the trade, just buy back your calls, and sell your stock. This approach is more conservative than owning a stock outright. Also, you can sell deep in the money calls, which insures you to the downside and just receive the time value of the option as income.
Ewilds 4 years ago 6
Covered calls do not eliminate market risk, but they are more "conservative" because selling a covered call does generate income. Also, the writer gets to choose the strike price in which to liquidate the stock, not they buyer. Covered calls don't expose you to anymore risk than owning a stock. If your stock drops and you think it will continue to drop, just buy back your covered call and then sell your stock. You are not obligated to deliver the shares once your position is closed.
Ewilds 4 years ago
Yes, you can lose money on covered calls. However, you need to educate yourself on the stock! Covered calls work best in a flat market, I feel bad for this guy, but it seems he put his entire life savings in one stock, bad move, especially if you know nothing about fundamental analysis!!
defina44 4 years ago
I love the CC's and never didn't make a consistant 22% Very conservative investment vehicle and can be beneficial to a less agressive trader. Want some fun... Trade Forex. Be good and good luck!
randallpaulcom 4 years ago