 Hello everyone traders friends investors Lee Lowell here from smartoptionseller.com today is Saturday June 26 2021 welcome welcome to another edition of our Saturday YouTube videos We're starting a new new format here this weekend I've gotten some feedback from from watchers that they they want to see some shorter videos shorter clips of how we do things So typically our our videos can run anywhere from you know 45 50 minutes Which I understand is long people people don't have a lot of time to really sit down for that long So they want to watch things in shorter chunks. So typically what I would do is I Would go over an options trading strategy and then I would move into our Saturday synopsis Which is where I look at the charts and I see how the indexes are moving and individual stocks are moving So I'm going to start Cutting those into two separate pieces now So this first video will be the the options trading strategy And then I'll do a completely separate video just for the Saturday synopsis to break it up make it easier for everyone So I hope you enjoy this format if you have some feedback on it Please please leave me a comment sending email because I love hearing from you I want to give you guys the best information possible. So let's jump right in To our options trading strategy for the day as you see on your your screen in front of you We will be talking about selling covered calls one of the great options trading strategies and one That's available to practically everybody that opens up an options trading account I get lots of questions about how to trade covered calls and what actually are they? So today we'll talk a little bit about that and it's also one of the four strategies that I list in my book Get rich with options for those of you who have read the book You know that I put this this strategy in one of the chapters for those of you that don't well That's in my book too. So let's talk about covered calls and what they are and why we want to sell covered calls And and why it's such a great strategy Well number one selling a covered call is a process where if you have 100 shares of stock in your account That you've either recently bought or if you had for years and years There's something you can do with those shares of stock to create an income stream for yourself an income stream that you may not have known really existed before and it's a way to Have someone pay you money for the opportunity to take to potentially take your shares away from you Sometime in the future at a much higher price than where you actually bought those shares of stock So let's go down my list here and and show you what the strategy is and why it's such a great thing now number one It's a way to increase or create an upfront income stream for every 100 shares of stock You have right here. You need to have at least 100 shares of stock in your account for every 100 shares of stock you have You can sell one call option contract Option contracts are all made up of 100 shares of stock so in order to Sell a covered call and we'll talk about selling versus buying in order to sell a covered call You have to have at least 100 shares of stock in your account if you don't have 100 shares You cannot execute this strategy. So what you're doing is so basically you bought Let's just say you bought some shares of a stock a long time ago And they just been sitting in your account and hopefully they've been going up in price And maybe they've been paying out a dividend well, there's another way to to add another layer of of Income or an income stream on top of what you're already getting whether that's price appreciation or the dividend income There's another way for you to create a cash flow and that's by selling a covered call What does that mean exactly? Well, there are call options Obviously options are either put options or call options in this case. We're talking about call options So we're not buying a call option. We're actually selling a call option Against the 100 shares of stock that are currently sitting in your account Now what do you can do is you can you can choose a call option of your You're the you have all the you have all the decision-making powers in this case you're going to choose a call option at a certain strike for certain expiration date and What happens when you sell that call option is that? You're giving the right to somebody else to take your shares away from you Well, why would we want to do that if we have stock in our account? We want it to go up higher in price. Why would we want to engage in a transaction where someone may possibly? Take our shares away from us and then we'll we won't be able to participate in any more price appreciation Well, yes That is one thing that you need to consider and right here in line number three is What I just wrote is that you need to be okay with the fact that at some point in the future You may have to relinquish your shares now some people will do this Because they have a have a price sellout point in mind when they first bought the shares they said okay I'm buying the shares here. I'm going to sell them up here when when the price reaches here. I'm okay to sell the shares Now you can obviously you can sell the shares whenever you want just put the order in with your broker But another way of doing that is by selling a covered call Which not only sets that same sellout price for you, but it you're actually someone's paying you For you to sell those shares to them So you're getting a little extra income just because you're going to sell your shares anyway You might as well take advantage of someone else paying you money and the other reason why someone might want to sell their their stocks is because Like I said, they've had them for a long time they have a sellout point in mind But they sell covered calls because they're gaining this income and they're using they're picking a sellout point That's just way out of range of where the stock Might trade to so they're they're they're using probability analysis Which I'll show you by using a probability calculator because they want to gain the income by selling the call option They're not really interested in letting go of their shares. They don't want to relinquish their shares So they're they're choosing an area where the stock most likely won't rise to by the expiration date of the option contract So you have people that that have have certainly set a sell point. They're saying okay. I want to sell here I'm fine with giving my shares But then there's other people that sell call options because they're they're playing the probabilities They're thinking well, there's no way the stock's gonna rise this high So I'll sell that call option and I'll keep the money and hopefully the stock won't rise that far So those are people that are just trying to play the probabilities And in some cases the stock does rise too far and they're they have a decision to make that Okay, well, do I want to relinquish my shares or do I want to? take plan B which is to Adjust the trade so we'll also talk about that So here we are we've got a strategy where it can create a current income stream And you need to have at least 100 shares of stock in your account and you need to be okay With potentially relinquishing your shares I'm going to show you how you can lessen the opportunity to have your shares taken away from you And that's by choosing out of the money strike prices when you sell the call option You choose an out of the money strike. So if the stock's at 100 You can sell the 120 call the 130 call Those are out of the money strikes and and the stock would have to move pretty far In order for you to have to relinquish your shares So if you if you have the thought that you know what I have these shares of stock in my account And I want to hold on to them for a while. I don't really want to relinquish them How can I lessen the the chance of that happening while still? You know gaining this income that the call option buyers will pay me Well, that's by choosing out of the money strike prices And the longer the date the the longer to expiration You choose The further out of the money strike you can choose as well So, you know longer dated options obviously pay more more time equals more money So you'll get more money for those call options, but you'll also have more what we call upside buffer You're giving the stock more room to run higher without the the the sure thing of you having to relinquish your shares Okay So what happens is that let's just say the stock's at 100 and you sold 120 call That means if the stock rises to 120 dollars, you will have to relinquish your shares But if the stock doesn't rise to the strike price if the stock doesn't rise to 120 Then the the the trade will just expire at the expiration date and you'll keep the money That was given to you by the the option buyer and now you can do the process again You can sell another covered call for another expiration date So theoretically you can just keep rolling these covered call trades You know years into the future as long as the stock doesn't move above the strike price Then you're good to go and you can keep collecting the money And you wait for expiration to show up if the option expires worthless You just do it again So the the key to doing that is choosing a strike price above the current price of the stock So you want to give the stock less of a chance to move up And we'll look at an example We're going to look at an example of how that works now if the stock does Breach the strike price and you have to relinquish your shares Well, then you know if you're okay with that then it's fine Not only will you get the price appreciation Price appreciation from where you bought it to where you have to sell the stock But you also get to keep the money that that call option buyer paid you So if you're assigned the shares at expiration to scroll down here The broker will handle the whole transaction for you You know at expiration The broker will take your shares out of your account But just know that at the stock goes up you've made that price appreciation on the stock So you actually made money Okay, so we're going to look at an example using intel of how that works now Down here. I want to I want to just show you what you can do is that Let's just say the stock starts to move really quickly higher on you and you're and you're thinking god You know the stock moved all the way higher. I didn't think it was going to get that high I really don't want to relinquish my shares. You know, what do I do? What's my defense plan here? Well As with any other option trade you can buy the stuff you can buy that option contract back at any time you like You're not married to it. You don't have to hold it until expiration. You can always get out of the trade So right here you can always buy the option back at any time if you're not comfortable anymore So if the stock really starts to move higher on you and you're thinking I don't want to sell my shares All you have to do is buy that call option back at its going rate Now when you do that you may end up buying it back at a higher price than what you originally sold that option for So you may take a loss by buying that call option back But at the same time The price appreciation you're making on the stock itself will overtake that loss You're all you'll always make more money on the stock going up because you have 100 shares So you're making money as the stock goes up But that call option value will go up as well So if you have to buy the call option back, you're probably you may take a loss on the call option But the price appreciation that you've made on the 100 shares of stock will outweigh that loss So you're actually still in a very good situation Okay, even though you have to buy that that call option back and then you could sell a further higher up strike price on that call option if you wish Okay, and the last last line here, and this is very very important I want everyone to make sure they understand this and and I will show it in the example is that Make sure you choose a strike price when you sell a covered call You have to make sure you choose a strike price That if you get if you have to relinquish your shares You will you will relinquish those shares above your original cost basis on the stock Okay, that's very important and I'm going to show you in the next slide here How that works with with an actual example of shares of stock now We're going to look at we're going to look at an example with intel and this is a this is an example only this is not a real live recommendation So Let's just take a look here We're using intel and let's just say your long shares of intel You bought 100 shares of intel not that long ago at $60 a share. Okay, so you're in the trade Um at $60 a share for intel you bought 100 shares now. You're thinking you know what I want to sell some covered calls I want to you know get some current income and You know pad my account a little bit more. What what do I do? How do I how do I sell a covered call on these intel shares that I just bought at $60 a share? Well with intel let's go to our chart real quick and and pull up the stock of intel and we'll see where we're at here So here's a daily chart of intel and we will go over this in the Saturday synopsis if you stick around for that that other video um intel closed around $55.91 yesterday friday June 25th 2021 Okay, so let's just say you bought some shares of intel at $60 a share It's currently at $55.91. So you're actually You know underwater right now on those 100 shares that you bought. Okay, so let's go back to our Our document here. So you bought 100 shares of intel at $60 a share You want to you want to sell a covered call and get some income? So you're going to choose a september 2021 $65 strike call option For 55 cents a contract. Now, where do we get that? Well, let me pull up my option chain at interactive brokers here I already have it teed up for the intel options Here's my intel tab up here and uh, you know interactive brokers has the last trade of intel at $55.81 on the chart It's at $55.91. So let's just In the middle here $55.90 where intel went out yesterday on friday June 25th. So you bought it at $60. It's at $55.90. So you're down a few dollars But when you want to choose and how do you choose your The call option to sell you have to go through the expiration dates and decide, you know How far out in time do I want to go and how much money can I receive by looking at the strike prices? So let me move myself over here a little bit So when you pull up the your option chain We got call options on the left here and here's your strike prices in the middle So you're thinking okay, I bought shares at $60 And I'm going to look at a $65 strike because I bought intel at 60 You know what I'd be okay selling the shares potentially at $65. That would be a $5 gain You know $500 profit on the price appreciation So I'm looking at the 65 strike and I scroll over to the bid nascom. That's the most current Value for the intel strike 65 call options that expired that closed yesterday on friday So here's it went out 52 cent bid at 50 59 cent offer So we always want to transactions to make the transactions somewhere in between the bid nas so let's use 55 cents As our fair value In midpoint. Okay, so what you can do is you can sell This september 2021 83 days in the future $65 call For 55 cents per contract. Okay, that's what we've chosen Now you can always go to shorter expirations Let's just look at the august expiration 65 calls the shorter the time to expiration the less money you will receive Okay, so those 65 calls are worth about 38 cents The septembers that we're looking at are worth about Um 55 cents. That's what we just decided We we look at the in between the bid nas now if you go and look at a different expiration. Let's just say october 65s Let's see what those would be worth Should be worth more than 55. Okay, so they're worth about 75 cents You can even go look at the 70 calls. Those are worth about, you know, 33 34 cents So you have to decide Where would I be comfortable potentially unloading my shares of intel? I bought them at 60 They're currently around 55 56 dollars, but I want to try to sell them at 65 maybe 70 dollars. So you have to manually go through each expiration Date look at the strike column decide, you know, where you would potentially like to sell the shares And and see how much money someone is willing to give you To relinquish your shares. So let's just stick with these september options The 65 calls are worth 55 cents of contracts. So let's go back to our cheat sheet here And I will move myself back over So what have we done here? So we were along 100 shares from 60. We're going to sell 165 strike call september for 55 cents of contract. What does that mean? Well with 100 share multiplier You multiply the option price times 100 So you get 55 dollars right up front. Someone will pay you 55 dollars today Um For the opportunity to take your shares away from you at 65 dollars a share Well, why if if intel's currently at 55 dollars, why would someone want to Buy the shares at 65? Why would they want to take your shares away at 65 dollars? Well, that would only happen if intel actually moved back up above 65 dollars a share by expiration Let's just say intel's trading at 70 dollars a share at expiration Well, you have to sell those shares at 65 bucks to the option buyer and they get to buy those shares at 65 While it's currently trading at 70 in the open market Okay, so that's why someone would someone's paying you for the opportunity To to buy your to take your shares away from you at 65 dollars and the option buyer They don't know where intel's going to be at expiration. They're just they're taking, you know, a guess a speculation That's what they're doing. They're speculating that intel will go from 56 dollars today Above 65 dollars by september We don't know no one knows where intel will be but they're they're taking a shot And you're taking a shot as well. You're thinking well, you know, I don't really care where intel is As long as I get my 55 dollars and if intel finishes at 70 dollars Um, I still have to sell them at 65, but you know what I bought intel at 60 I have to sell them at 65. So I've made $500 profit So that still works out. Okay. So let's look at the example here You're going to receive 55 dollars for selling that call-ups now if intel stock is trading above 65 dollars at expiration Your shares will get called away But you get to keep the 55 dollar upfront payment and you have that 500 dollars of price appreciation You bought the shares at 60. You have to sell them at 65. So you've made 500 bucks plus another 55 So you've made $555 By doing this trade Now if intel Finishes below 65 dollars at expiration Then the trade just expires worthless. The stock didn't go above 65. So you're free and clear now You get to keep the 55 dollars and you get to keep your shares of stock shares of stock are still intact So what do we do now? Well, we repeat the process now. Let's just say let's just say it's september And intel finishes below 65. So you get your 55 dollars Your shares are still intact. So now you sell let's just say a december 2021 70 call or 65 call whatever you choose you go through the You know the process again and you sell another call option and you get maybe another 55 dollars whatever whatever it is at that time And let's just say intel doesn't Rise above the strike price by that expiration. Well, then you do the process again And you sell another round of covered calls So it could be an ongoing process as long as the stock doesn't go above your strike price at expiration Now if the stock drops Obviously the the option will expire worth as you keep the money But but if the stock drops really far now, you're looking at You know a loss on the the shares of stock that you currently own just like the intel example right now If you bought the shares at 60 and intel is around 56 dollars right now You're roughly 400 dollars in the hole You're 400 dollars in the hole, but this 55 dollars that you just collected helps You know buffer some of that loss that you're currently holding Right, and if you do the trade again in another few months if you're still, you know, at a loss on the shares The the the income that you're collecting from selling covered calls can help offset some of that price appreciation loss Okay, so that's one of the other reasons why people sell covered calls is because they it helps buffer A stock that might be currently underwater for them. Okay, so that's why selling covered calls helps Now let's go to Talk about the the very important Thing that I mentioned in this first slide is that make sure to choose a strike price above your stock Break-even price. What does that mean? Well, let's look at the example here We know that you bought shares of intel at 60 dollars You never want to choose a strike price That where you'll have to relinquish your shares below 60 dollars Because then you're just going to lock yourself into a loss Which is something you don't want to do. Well, how do you know? What the break-even is? How do you know which strike price would would be dangerous in that situation? Well, you then you have to go back to the option chain. So let's pull up the option chain again And we're looking at the september the september call options Move myself one more time. Now. We know that you bought 100 shares Of intel at 60 dollars a share. So your cost basis is 60 dollars So you don't want to have to relinquish shares anything below 60 dollars a share because that would just defeat the purpose It would it would make no sense of you doing that With with intel stock currently at 55 90 or so You know that you have you you're currently with a paper loss of 400 dollars a share right now And you're thinking well, you know what I want to sell a call option to help defray some of that You know paper loss that i'm currently holding right now I'm going to choose, you know, uh, a close to the an at the money strike price on intel And the september 55 calls that's roughly an at the money strike Uh, we scroll over you can see how much money you can get you can get about $3 and 50 cents per contract For that option you're thinking well, that's 350 actual dollars. Someone will pay me right now So you're thinking okay. Well, i'm currently at you know, almost a four I'm about a 400 dollar paper loss on the stock if someone's going to give me 350 dollars. Well, that could you know instantly make up that loss But Here's the here's the thing You want to know what the break even is is if uh, if you have to actually sell the shares So how do you do that? You take the strike price? 55 and you add it to the cost of the option, which is 350 So $3 and 50 cents plus 55 Equals $58 and 55 cents. Let me let me bring up my sheet here we're talking about Not Choosing a strike price that will get you out of the trade below your cost basis basis The 55 calls Are trading are worth $3 and 55 cents. Here's how you find that break even You add the strike price 55 plus 350 for the option. That's 58 50 if intel ends up above $55 at expiration Which is the strike price Someone is going the call option buyer is going to make you relinquish your shares at $55 a share They will get to buy the stock at $55 a share Now which in your case if you sold it for 350 Now your break even is $58 and 50 cents when you relinquish those shares So what you ended up doing is when you bought intel at 60 But now you have to sell them At an adjusted price of $58 and 50 cents You're locking yourself into a dollar 50 loss or $150 loss regardless So you don't want to do that. You don't want to lock yourself into a loss even though someone's paying you $350 if intel rallies back above or stays above $55 You're going to have to sell your shares at $55 but add the 350 to it So you're really selling the shares at 58 50 Which is below your buy-in of $60. You don't want to do that. So how do you how do you get away from that happening? Well, make sure you choose a strike price that will get you out of the trade at least above $60 a share So let's look at the 57 and a half calls which are worth about, you know, $2 and 20 cents of contract 220 you add 220 to 57 50 That's $59 and 70 cents. That's still below your Your cost basis of $60. So you don't want to sell anything below the 57 and a half calls Let's see what the 60 calls are worth 60 calls are worth about a dollar You know a dollar 40 maybe so a dollar 40 plus 60 is 61 dollars and 40 cents So yes, that would take you out of the trade at 61 dollars and 40 cents. You'd make a dollar 40 price appreciation Now this all wouldn't this all wouldn't matter if if the the stock price of intel Keeps dropping or stays below the strike price. But if intel rallies You want to make sure when you relinquish your shares that it's above your original cost basis of $60 a share So this might sound confusing to some of you Just just remember where your original cost basis is which is $60 and choose a strike price When you and which when you add it to the cost of the option is above your cost basis for the stock because you don't want to relinquish your shares Below your original cost basis. Okay, so know your break evens when you buy when you sell the call option Know what your break even is you know where this it will take you out of the trade in this case If we when we sell the 65 calls for 55 cents That is a break even of 65 dollars and 55 cents strike price plus 55 cents is 65 dollars and 55 cents Your cost basis is 60 now you're going to sell it at 65 dollars and 55 cents You got that five dollars and 55 cents of price appreciation And that's only if intel ends up above 65 dollars at expiration. It's all depends on where the stock finishes at expiration So your goal is Well, if you want to sell the shares the and and you and if you have to sell the shares, that's fine You'll have your price appreciation if you don't want to relinquish the shares You're hoping that the stock stays below the strike price Right, okay So let's take a quick look at at how to help You know choose a strike price and an expiration date You can do that by by using the probability calculator Okay, this is on our website if you go to our website and you go look a helpful links We have a uh, you know a spot on our website called helpful links Probability calculators is the first one listed here. Here's a probability calculator So I I've defaulted I put 55 dollars and 89 cents for intel's current price I want to know what the chances are of it getting above 65 dollars The strike price by expiration in 83 days from now The future volatility is about 35 percent for intel So here's what it's telling me. There's an 81.72 chance that intel Will not go above 65 dollars at expiration Conversely, there's an 18 chance that it will go above 65 dollars at at expiration So you have to decide are you willing to give up the shares? You know, you can choose an expiration date um Of your choosing You know go through the the expiration cycles like I've shown you check the check the probability calculator 81 0.7 chance of intel not going above 65 dollars in the next 83 days. Is that a high enough opportunity for you? It's up to you. So you have to manually go through do these what-if scenarios and figure out, you know What works for you and are you willing to potentially give up your shares? Okay, so there you go. That's how it works with selling covered calls It's a great way to it's a great way to create another income stream for yourself um Make sure you choose a strike price that that would work for you if you have to give up your shares Make sure you're happy with that price And if you don't like to trade anymore you get out of it You can always buy the call option back and resell a new one at a higher expert at a higher strike price to give yourself Some more upside buffer. All right, so that's it for your your lesson on How to sell covered calls? Let's just go You know, I'll open up the the website here, you know, here's our smart option seller website If you go over to the more tab you click on the helpful links, here's the probability calculator right here I also want to talk about our put selling basics guide If you want to learn about selling put options Which is something we do more than anything else at the smart option seller Click on the put selling basics link and put in your name and email address. We'll send you a free copy We have our services always we have our two newsletters and our one-on-one coaching for anyone that's looking for more help All right, so that's it for this week. I hope this content has been good for you Give me a thumbs up. Don't forget to subscribe hit that red subscribe button Give me a thumbs up. Leave me a comment if you have some questions about covered calls what they are Send me an email. I always love hearing from you. All right. That's it for me today I hope everyone has a great weekend and a great week ahead. This is Lee Lowell signing off