 Welcome back in this lesson we're going to review the covered call strategy. So I think this is a strategy that a lot of newer traders gravitate to in the beginning because they're used to the concept of buying and selling stock and this has a stock component to it and it just adds on an option piece to the buying of stock. Market assumption is you want to be bullish so you want the stock to go up, you want to apply volatility to be relatively high, optimal time frame kind of that 30 to 60 days to expiration, profit target 25 to 50 percent of max. The downside risk is the stock could go to zero just like if you owned a stock outright and the upside risk is none because you're making money if it goes up and then the probability of profit is 55 percent or greater. So the trade setup is simple you're simply buying 100 shares of stock or one future and then you're going to sell one out of the money call around the 30 delta against that position. So the other thing that people use this for is let's say that you have an IRA or you have a portfolio that's already made up of some individual stocks. Well what you can come in and do is you can come in and sell these 30 delta calls against your stock positions that you already own and collect this premium and collect basically this income component to your already owned stock portfolio. So that's what I see a lot of people do. Time decay on this one theta works positively so it works in your favor. So let's go to the platform and take a look at an example. So I'm gonna stick with XRT which we've shown in a couple other of the bullish high IV examples basically because at the time of this recording it's one of the only symbols out there with high implied volatility over 50 IV percentiles currently at 54. The other reason I would look at this as a potential candidate is because we've seen a downside move in XRT. So I like to buy things when they've gone down and sell things when they've gone up kind of a contrarian methodology and so XRT would be a good candidate for a covered call. So you're simply going to go to the trade tab and go to the call side and remember we want kind of that 30 around that 30 delta call. So right now we've got a 29 or we've got a 40. Again I always like to opt for the higher one. You can do 29. It's actually a lot closer to 30 obviously but I always just as a practice I like to go 30 or above and so I would choose the 40. The difference is you're going to give up a little bit of profit potential for a little bit higher probability of success. So I'll show you what I mean by that. So to enter the trade you're simply going to right click on that call that you want and you're going to buy a covered stock. So Thinkorswim calls it covered stock covered call same kind of trade. So covered stock populates it right here and then we can just right click and analyze that trade. That's going to populate it on our analyze tab. We can move our dotted line here to the break even point to see what the probabilities are and as you can see here the probability of profit on this trade between now and expiration is a little over 58.5 percent. So why is that important? So what I want to compare this to is what if you simply just bought the stock. We've already shown this in another video but let's take a look. So if we simply buy the stock and analyze that let's click off this one so we're just looking at the stock. Look at what our look at what our probabilities of just buying the stock are. About 48, 51, about 50, 50. It's about a 50, 50 bet and actually I need to move that onto the break even point. So about a 50, 50 bet give or take a little bit one way or another. But by simply adding this call component with this covered call on we're limiting our upside. So you are limiting your upside however now your probability of profit goes from 50 percent up to over 58 and a half. So that's the value here. You're adding that theta component in there. You're adding that time decay component which over time you're going to outperform just simply buying the stock. So you got about a 58 percent. You've got the positive theta. You've got the positive time decay and so that's what the risk profile will look like. So what else does this look like? One of the other strategies that we've already gone over it was a short naked put. The risk profile looks almost exactly the same. So why would you do one over the other? Well if you're selling a put you're going to use a lot less capital. But like I said one of the key reasons where you would use a covered call is if you already own the stock, let's say you already own stock in XRT, well then you could come in and sell the calls against it to add that theta component. You'd limit your upside but you'd get that positive theta decay, that positive time decay in your favor. And then as far as the time to take this off, kind of that 25 to 50 percent. So if it gets up in this range here where you've got about 25 to 50 percent of your max profit, your max profit in this case is $175. So once you reach 25 to 50 percent, take this off, redeploy that capital into another trade. The only caveat on that going back to the example of already owning the stock, let's say it's a stock that you that you want to own long term and you're not looking to buy and you're not looking to trade that stock, you're looking at it as a one-to-tenure investment kind of thing. But you like the idea of selling the calls against it to give you a buffer to the downside as well as collect that theta. Well you could simply just you know wait until the you know if it gets to here then you could get out of that call and you'd sell another one. So you could hold the stock in place and continue just to sell these calls against that stock position every month to collect that theta. Hope that was helpful. We'll see you in the next lesson.