 Hey everyone, Lee Lowell here, smartoptionseller.com. How's everyone doing today? Welcome to another one of our options educational videos. Today, as you can see on your screen, and it is November 13, 2021. I'd like to do these videos, try to help you become a better and smarter options trader. Been in this business for 30 years now. So I make these short videos to help you and talk to you about certain strategies. Today, as you can see on your screen here, we're going to be talking about selling covered calls. It is one of the four strategies that I outline in my book here, Shameless Plug. And I'll show you where you can get that book if you don't have it already. But one of the strategies that we talk about in the book are selling covered calls. And I've been getting a lot of emails of late from people as the market has been hitting all-time new highs lately. People are wondering, how can I keep my bullish positions but maybe protect myself a little bit because I'm afraid of a downturn in the market? And I don't want to sell my shares, but I want to cover myself a little bit. How can I play that? Is there a way to play that scenario to give me a little downside protection, maybe bringing a little income, but keep my basic bullish position? And yes, there is a way you can do that, and it's by selling covered calls. So that will be the topic of the day. So let's just jump right in and talk about what is selling covered calls. And the way that I've described it in the title here is that can you become a stock landlord? And by that, I mean, can you rent out your shares? Will you rent out your shares? Of course, you can rent out your shares, but renting out your shares is what is done when you sell covered calls. And let's talk about how it's done, the process, the mechanics, and why it could be a good thing for you. So here, as you follow along with me here, how it's done. How do you sell a covered call? And for every 100 shares of stock that you own that may have been just sitting in your portfolio, maybe hasn't been going anywhere, just kind of sitting around and you collect a dividend here and there. But for every 100 shares of stock you own, you can sell one covered call contract. And why one contract? Because each option contract consists of 100 shares of stock. So for every 100 shares that you own, you can sell a call option contract against your 100 shares. And by doing so, by selling that call option contract, you're going to collect a premium from the call option buyer. And that premium goes right into your account. It's yours to keep. You can do whatever you want with that. But what happens when you sell that call option contract? In essence, right here, in essence, what you're doing is you're renting out your shares to someone for a period of time. And there's an opportunity or there's a chance that depending on where the stock trades by the expiration date, your shares could get called away from you. Your shares could get taken away from you. So some people ask, well, what's the point of selling a covered call? Why would I want to do that? Well, here it is right here. It can offer income generation. When you sell something, someone's going to pay you for it. So you're collecting income. It can offer you some downside protection. By collecting that income, you're getting a little buffer in case the stock price starts to drop a little bit. If you bought some shares and the stock price to drop, you're holding something that has a paper loss at the moment. So by selling a covered call, you're collecting some income and you're buffering the opportunity. In case the stock falls, you're giving yourself a little buffer, a little extra income. And it offers an opportunity to sell your shares for a profit. Let's just say you've held a stock and it's rallied quite a bit. And you're thinking, maybe the stock has topped out. Maybe I'll sell a covered call and I can sell my shares at a good price, if that's what you're looking to do. So let's talk about what happens here. So let's say you own 100 shares of stock and you decided to sell a covered call. Well, here's what could happen. If the stock rallies above the strike price and the strike price is the level where you've decided that you'll sell your shares, you'll have to relinquish your shares. You'll have to give up your shares. And is that a bad thing? Is that a bad thing that you have to relinquish your shares? Not if you wanna take profits and lock in your gains, it's not a bad thing. So it's not necessarily a bad thing as it can produce capital appreciation. It could help you lock in and collect all that paper profits that you've collected along the way or if you've built up along the way. So in the landlord analogy, it's like you're renting out your shares to own. You're renting your shares out for a while and there's the opportunity for the buyer to own those shares at the expiration. But there's only one way for you to have to relinquish your shares and that is the stock has to move above the strike price. And if you're not willing to relinquish your shares, then there's ways that you can mitigate that. And that is by selling out of the money strike prices, there's a good chance that your shares won't get called away from you. And if that happens by the expiration date, your shares don't get called away from you, you can now repeat the process and sell another covered call for a longer expiration date and collect more income. So it's like an ongoing rental property for you. You rent out your shares for a period of time, stock doesn't make the move, the option expires and you get to repeat the process. You get to rent out your shares for another X amount of months, whatever it is, whatever, you know, expiration date you choose, okay? So we'll talk about this. So you have to choose, you choose which strike an expiration to use, right? If the stock is here, you decide, okay, well, I'm willing to possibly relinquish my shares up here or here or way up here, you decide and you decide which expiration to choose. Now, if you haven't really done this before, all options have an expiration date. Some options expire a week from now, a month from now, six months from now, two years from now, you have to decide which one to use. And the longer out in time you go, the more money you will receive. So you have to decide, you have to weigh, you know, how much time do I want to give? What strike price do I want to use? So it's all about, you have to look at the options chains and see how much these options are trading for and how much money you can collect within each expiration period. So let's just go over an example to understand, you know, what the real value is and what the point of selling covered calls is, okay? Or selling covered calls are. So let's just look at an example. Example only, this is not a recommendation. So let's just say you had purchased 100 shares of Apple at $100 per share last year. Okay, you got a $10,000 investment, you got 100 shares at $100 each, at $100 per each. Now, Apple's been going up over time. Apple's at roughly $150 a share right now. So you've made $50 of capital appreciation, paper profits right now. And you're thinking, you know what, maybe, you know, maybe I want to sell Apple sometime in the future, take some money off the table. What can you do? Well, what you can do is, an example, let's just say you decided you're gonna sell a May 2022 170 strike call option for $5 per contract. What does that mean? So if Apple's at $150 a share, you're selling the 170 strike call option and you're getting $5 per share or $5 per contract for that, what does that mean? Well, by selling that 170 call for $5 per contract, you're immediately getting $500 from the option buyer. How do we get $500? Option contracts trade in dollars per contract, but you have to multiply that by 100 because each option contract consists of 100 shares of stocks. So you always multiply the option price times 100. So $5 per contract times 100 is $500. So you receive $500 to rent out your shares until May of 2022 at a strike price of 170. So what does that do for you? What did you just do by selling this 170 call option? What you've done is now you're obligating yourself until May 2022 to sell Apple at $170 a share. At 150 right now, and you're obligating yourself to sell it for 170, another $20 worth of income or price appreciation for you. So let's just look at what happens if that comes true. So result if Apple trades up to $170 by next May, what happens? Well, you have to sell your shares at $170. And your capital appreciation, your net gain from the time you purchased it at $100 a share to selling it at $170 is a $7,000 gain for yourself, $100 times $70, a price appreciation is $7,000, okay? But you also got the $500 option premium that the buyer paid you. So in net, you've made $7,500 once you relinquish your shares at $170. So that's pretty good. You've just made $7,500 and you're thinking, all right, good, I sold Apple for $170 and I walked away with a good profit plus the extra $500 to boot. Now the other thing is that, let's just say Apple doesn't rise above $170 by May, right here, if Apple remains below $170 by May 2022, the option will expire, it'll just disappear. And you will have no more obligation to sell your shares at $170. So what's come out of this? Well, let's just say Apple moved up to $165 a share. Didn't get up to $170, so you don't have to sell your shares. So it's at $165 now, you've made another $15, a price appreciation. You also made the $500 of option premium, but you have no more obligation anymore. So what you can do now is now sell another call option contract. Let's say Apple's now at $165. Well, maybe you can sell a $195 call contract or a $200 strike call option contract for another $5 per contract. So you can take in another $500, and now your obligation to sell Apple has risen up to $195 or $200. So you can continually roll these, roll these trades if your obligation doesn't get fulfilled. That's what most people like to do. They will sell the out of the money strikes, out of the money means if the stock's here, you choose a strike price up here, that's called out of the money, which helps lessen the chance that you'll have to relinquish your shares. If you really wanna hold on to Apple forever, then it's in your best interest to choose one of these out of the money strikes that have a very small probability of Apple actually moving up there by the expiration date. And most people will say, well, how do I know whether Apple is going to move up to that level by the date? I have no idea. Well, one thing you can do is you can check a probability calculator. You can see the chances of a stock moving from point A to point B. Now, let me show you how you can do that on our website. So what you see on your screen in front of you now, I just went to our website. If you go to our website, smartopsinseller.com, you can click on probability calculator right here. Okay, you see this right here. And it will bring up our probability calculator. And this can help you get an idea of, what are the chances of a stock moving from point A to point B? In this case, we wanna know what are the chances of Apple moving from its current price of 150? And I've prefilled this out here. In the top here, these are the input section. This is what you wanna do. Apple's currently around 150. Our expiration date is May, 2022. It's 188 days in the future. Volatility, Apple I think is around 25% volatility. You can check these numbers online. You can do a Google search for volatility of Apple. I like to go to ivolatility.com. That's where I usually get my volatility information. Apple's around 25% volatility. And we wanna put in the target. We have two target boxes. In this case, we put the same number, 170. That's our strike price that we're choosing. We wanna know, what are the chances of Apple moving from 150 to 170 in the next 188 days? And when you click on Go, you'll get down here, is the answer. There's about 75% chance that Apple will finish below 170 in the future. Conversely, there's a 25% chance that Apple will finish above 170 in the future. So you have to say to yourself, okay, I have a 75% chance that Apple won't go above 170. So I have a 75% chance that I won't have to relinquish my shares. Now, if 75% chance is not a high enough number for you, all you have to do is you can pick a different strike price. Now, let's say we change this to 180. Now, Apple has to move all the way up to 180. If we click on Go, we'll see, okay, now there's only a roughly 15% chance that Apple will move above 180. So the higher the strike price, the less of the chance the stock has to move there. But conversely, you're going to collect less money for that. The 180 strike is gonna give you less money than the 170 strike. So you have to weigh out, well, how much money do I wanna get versus how much of the chance do I want to relinquish my shares? The more money you get, the higher the probability you'll have to relinquish your shares. The less money you get, the less probability you'll have to relinquish your shares. So it's all about what's your comfort level? Where do you feel comfortable getting rid of the shares? Now, some people will say, if I've sold a 170 strike and then all of a sudden Apple's at $200, I still have to get rid of my shares at 170 and I'm gonna be missing out on that run up. Yes, that is a possibility. That's something that you have to consider when you're selling covered calls. That's why using a probability calculator can help you gauge which strike price you should choose. Now also, if you go out even more time, let's just say we go out to, let's use the June 20, another month out in time and we click go. So the longer time you give as well, the more there's a chance the stock can move above the strike price. So another thing you have to waste how far out in time do you wanna go? So use a probability calculator to help you gauge what are the chances? Now if we go back to our, let's go to our option chain here and I'll show you and I pulled up Apple options here. Now we have the May 2022 options right here. Let me move myself over here a little bit and these are the call options on the left here. So we're looking here's Apple's last price on Friday, November 12th, 149.73, just under $150 a share. So we're keying in on these 170 calls over here which went out 495 bid at 505 offer, okay, right here. And right in the middle is about $5 per contract just like we put in the example that's $500 that you will receive in your account. And these for the May 2022s, all right. So if you chose the 180s, scroll down a little here. If you give yourself another $10 a buffer you're gonna get roughly $320 or $325 somewhere in that range. So it's less than the 170 calls you get 500 for the 170s you get about 320 for the 180s but you got 10 extra dollars of buffer. So you have to decide how much you wanna collect versus what are the chances of you having to sell out the shares. So yes, there's always the opportunity that you may miss more of a run up in the price of the stock, that's the risk you take. But the probability calculator is telling you there's a 75% chance that Apple won't travel that far in the next 188 days. Maybe it will, maybe it won't. The probability calculator is not 100%. It's not 100% guarantee, it's just a probability. All based on the way Apple stock has traded in the past. Can Apple move that far in 188 days? Based on its movements in the past, it's saying there's a 75% chance that it won't get that high. So you won't have to relinquish your shares. Not a guarantee, but it's a high probability. That's what the probability calculator tells you. So it's all about figuring out what strike price should I choose, what expiration I should choose. Now, let's just say we decided to choose a very short-term expiration, December 17th, which is 34 days from now. What kind of money can you get? Well, the less time you give, the less money you will get. So if we look at these 170 calls that expire in 34 days, you're only gonna get about $26. Here it is, 25 cent bid at 28 cent offer. You multiply that by 100. Now you're talking, you'll get $25 to $28 somewhere in there. So let's just say you get $26, compared to $500 if you use the May options. So the less time you give, the less money you get. And if we go back to the probability calculator, if we knock this down to 34 days, we can change the days here and it'll change the expiration as well and move it down to 170. And it's gonna be a very high probability that it won't get there. Hit click on go, click on go. So now there's about a 95% chance that Apple won't be able to travel another $20 in the next 34 days. So lots of things to balance. How much time do you wanna give? How much money do you wanna get? What's the probability? So you can play around with this thing and help you gauge. But going back to the option chain, these 170 calls with 34 days left, you're only gonna get about $26. So you have to weigh out what works better for you. So let's quickly go back to our cheat sheet here. I'll reposition myself. So you can see that by picking the out of the money strike, there's less of a chance the stock could move that far and you'll get various amounts of money depending which strike you choose. Now let's talk about a situation where you bought Apple at 100, but now it's worth $70. You know, we always look at the best case scenario. Now let's look at a scenario that's not so good because I'm sure some of you might be in this scenario where you've bought a stock and it's actually fallen on you. So you're holding a losing position at the moment. Can selling covered calls help you regain some income or help pad or lessen the blow for that drop in the price of the stock? So let's just say you bought Apple at 100, but now it's worth $70 and you're holding a $30 per share loss. Is it worth to sell covered calls? It can be, but you have to make sure you choose the correct strike price. Which one is that? Well, if you bought Apple at 100 and now it's worth 70, this is very critical. And you need to listen, is that you have to choose a covered call option that if you have to relinquish the shares, it will take you out of them at least above $100 a share, your original cost basis. Okay, there's no sense in selling a covered call if in fact when you do relinquish the shares, you have to sell them at a price below your original buy-in level because that's gonna lock in a guaranteed losing trade. So let's talk about what that means here. So let's say that you've bought 100 shares at 100, it's now worth 70. Choose one that will at least obligate you to sell your shares above your original cost basis of $100. So let's look an example of where that could go wrong. So Apple's at $70. Let's just say you decided, okay, I'm gonna sell an $80 call option for $5 per share. Okay, you'll get the $500, but now you're obligated to sell your shares at $80 each. You purchase them at 100, you're obligating yourself to sell them at 80. That's gonna lock in a $20 per share loss for you minus the $500 that you'll get. So if you read here, you're gonna lock yourself into a guaranteed $15 per share loss if Apple travels from 70 to above 80 by expiration. So here's the example. If you sell an 80 call for $5 per share, and if Apple trades back above 80 before expiration, or I say at expiration, you'll be forced to sell your shares at $80, which will lock in a $20 capital loss. But by getting the $500 or $5 per contract of the option, your net loss will be $15. So this is very critical, is that if you're currently underwater with a stock that you purchase and you wanna sell a covered call, make sure it's a strike price at an expiration month that will at least take you out above the $100, your $100 buying level. How can you do that? Well, you may wanna look to sell a 90, a 95, or a $100 call option. If you sell a 90 call, that option price has to be at least more than $10 per contract, because that'll take you out above your $100 buying. If you sell a 100 call option for $2, that's like essentially selling yourself out $102, at $102. So you need to make sure. How do you figure out whether you'll be getting out above your buying level? You take the strike price and you add it to the option premium that you'll receive. In this case, the 80 call, the option was worth $5. Add those two together. That's an $85 sellout point. If you sell a 95 call and it's worth $6, that's a 101 sellout point. You'll make a dollar on your original $100 cost basis. So this is a very important understand that you don't want to sell a covered call that can potentially take you out of the trade below your original cost buy-in, okay? Very important understand. So people that are underwater currently on a stock purchase, if you want to sell a covered call, you still have to choose a proper strike price. All right, so that's really about it for your lesson today on selling covered calls. If you get, you know, you can watch this video, you can reread everything that we've done here. And all right, so that pretty much sums it up. Once again, let me show you where you can get the probability calculator. You can look at purchasing my book if you want to. If you go back to our website, smartoptionseller.com, probability calculator's right here along the top. And you can get it there. If you go to our about page and scroll down, here's, you can click on this. This is my affiliate link. So if you click here, I will get paid a tiny bit of money if you purchase the book through this link on our about page. Otherwise you can just go straight through Amazon, purchase the book there. Lastly, you know, we are big option sellers here, smartoptionseller. We have our putselling basics free guide. You click on this link here, get a copy of our free putselling basics guide. If you wanna learn how to sell put options, put your name and email address here. And finally, under our services tab right here, we offer our two paid newsletters and our one-on-one coaching sessions if that is something that you need. All right, so that'll do it for me. I hope this has been helpful. Give me a thumbs up. Leave me a comment in this YouTube video. Don't forget to subscribe in that red button in the right bottom hand corner of the video. Send me an email if you have questions. I love hearing from you. And that's about it. Don't forget to watch our Saturday Synopsis. It'll be up in the upper right hand corner of this video. I'll put it in there. Saturday Synopsis, I go over the charts, show you what I'm seeing in the markets. All right, that's all for me today. I hope everyone has a great weekend and a great trading week ahead. This is Lee Lowell signing off.