The 5 Deadly Covered Call MISTAKES (which you may be making without knowing)
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- čas přidán 24. 07. 2024
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00:00 - Intro to Covered Calls
02:30 - What is a Covered Call with Examples
06:58 - Mistake Number 1
09:28 - Mistake Number 2
11:25 - Mistake Number 3
14:42 - Mistake Number 4
19:52 - Mistake Number 5
SMB Disclosures www.smbtraining.com/blog/smb-...
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I factor both gamma and delta plus spread out of the call or roll into a collar to limit risk reward to 1 on the principle
This was a great video for beginners. Thank you ❤
I thought u only lost when u sold?
You can always roll up/out if the stock turns very bullish. Also, if the stock goes down, you can write more covered calls and REDUCE your overall cost basis. This assumes you are very long a stock. Rolling and writing on dips smooths much of this out unless the stock is absolute garbage.
Was going to say this.
Yeah, I just wrote a reply asking this same thing in a more roundabout way. Glad you've confirmed my thoughts.
I'm absolutely certain now the leaving out of important information is SMB's ploy with these videos. They don't explain the overall considerations really, just pieces of it. And it's in every video they make. It's like they want people to be emboldened with the half-truths and half-knowledge they "teach". What I've learned is every trading strategy has an overall concept. Like with covered calls to me the strategy is, if the stock dips while you were expecting gains, use covered calls to continue to make money, until the stock hits your target price. For instance with the Tesla example, you could be making covered calls for months. It turns your original buy low sell high strategy to a longer term covered call campaign. No matter, you are still generating cash, just in a different way. And, at some point, you might even have made the money you would have made with your target price. That could be also a point to exit the ownership of Tesla,.IF you wish to turn your stock into capital for other means.
Also, just a help for others… you can always buy the call back. Many of the issues he points out can be simply avoided by buying back the call before expiration.
Love this video. Not enough out there that actually walk through potential risks and what could happen with possible approaches to mitigate such risks. I’ll be looking for more just like this on your channel. Thanks for spending the time to share your experience. 👍
I approach covered calls very differently. Never looked at it from a trading perspective, I always do it on stocks I want to hold so your example of the stock price going down means nothing to me. I want to invest in a stock so I sell puts first until the stock gets put to me. I then sell covered calls until the stock gets called away. Rinse and repeat. The wheel strategy. Just like I just sold a 170 call on Apple last week. If Apple goes to 150, it doesn’t matter because I’m holding Apple long term.. I think the difference in trading and investing should be explained…
I agree with your way of thinking as well
Wheelers all to frequently turn into bag holders stuck having to commit mistake number four.
Do you always sell the covered call above your cost basis? For example, I have 200 shares of Amazon with a cost basis of $133.58. If I sell a $135 CC out a month my premium would only be $8 an option.
@@MrJeff1256 That’s not much of a gain.. I would try to do at least $5 above but it also depends on the premium you get.. I would assume Amazon is pretty liquid. However, I don’t think volatility is very high right now.. Might be different going into next week.
@chillrobp Chilly 😎
Outstanding video. Clear, concise, and no BS. Excellent advice on what to be aware of! Ty.
GREAT POINTS! Number 3 'mistake' is actually what I do, but I'm not 'super bullish' on the stocks I write CC's on. I have a philosophical trading difference. Despite the 'swings' in price, the underlying stocks will continue to rise over the years; this is my strategy. I don't care what the stock does 'in the short term,' if you will. I want my weekly or monthly 'dividend'. that said....always have stops in place as insurance.
2 things helped me. 1 - Be a jerk and keep a few shares outside of calls in case call buyer wins 2 ) Keep your buy writes getting called at 0 days or ex div in a separate account away from rolling buy writes and separated holding shares // and maybe 3 - Stagger strikes and dates around events like div, Earnings and monthly's. Great video.
Sage advice!
I am an old investor for 20+ years. I am now looking to learn about options and start using options. This is such an excellent video and I have learned and taken notes. Thank you so much for this invaluable lesson. All the pieces of the puzzles are coming together now. I have subscribed.
Good video but you never spoke about how you are able to close or roll the option prior to expiry which most people do.
Guys: another great video on covered calls. Excellent information and it’s spot on. Keep up the great work!!
Great common sense info which is easy to forget. I’ll create a checklist and revisit it every month when I am writing/rolling calls. I especially appreciate #5 since I have been writing calls against my BRK-B shares which I purchased in 2006.
so whats the solution to this one then....
what helps me is having a trading platform that shows the "extrinsic value" (time value) of each call I am short. As the extrinsic value gets close to zero (no time value left) and if the call is in the money, you're likely to get assigned which you do NOT want to happen in your case. The fix is to roll the call out to a future month and maybe at the same time to a higher strike price.
Wow, this is helpful info for a beginner. Thank you so much!
One mistake I can think of is to try to selling ONE covered call option at perfect time and perfect strike price. No one can make 3-point shots all the time. What you need is a pocket deep enough to have more stock shares , say 1000, and to sell 10 CC at different strike prices and laddered premiums. You will not be able to sell all 10 CC in one day. Sometimes you will not be able to sell all 10 CC before the stock prices stars pulling back. That's when you decide to start buying back CC. The odds of making small but many premiums are on your side. You are basically trying to be a small casino dealer. You will need enough cash to be a dealer. Players, those who buy call options, statistically lose money.
thank you for the great video.
I believe for the last two mistakes you would still have the option to roll the call one month and receive a debit and at the same time set the strike price higher.
You do just an outstanding professional job at explaining this entire options business. Thanks very much!!!
Excellent video. You made your points succinctly and well! This’ll be a big help for those just getting into covered calls. Do you have a video on dividend capture in covered calls too?
If you intend on holding the shares, no matter what, you can follow the stock down with your short calls(cover calls), if it moves up, you just roll for more time, you only need to start rolling back up when you want to get out.
Great explanation of CC fundamentals. Depends how greedy one is. If one is bullish on the stock then write a long call out of the money. If the stock rises one may buy back without too much of loss premium. On the other hand the premium may shrink. I sold two staggered call about a week apart....bought them back and you know what happened next....
Excellent information. Thanks SMB capitol
Please explain how rolling out the covered call to later expiration will affect gains and losses. Thanks for posting such a good video.
thank you sir!! this video is great
This is crazy, I've always used covered calls to hedge against my positions. I'm going to watch this a few more times to wrap my brain around it. I typically set a stop on shares and sell a few calls on the rest to counter if the stock falls or buy naked calls if it falls to ride up, to add to my position later on red days. First time seeing this channel.
Wish I had this video at the beginning of 2021!
#4 precisely describes my last CC loss. So obvious, yet I haven't recognized this simple rule for decades.
Clear and excellent. Thank you.
What a great video. Thank you.
If the stock goes down as in your example, you pocket the premium, and retain the stock, which you can hold until it goes back up. Correct? You don't loose anything if you hold the stock correct?
I did cvd calls early in carreer before youtube/smb, for those new, heed this advice.
You can also use a collar if you think the stock might drop. Take a little of the premium from covered call and buy a put a little bit down past stock price. Make money on put if price drops to much.
14:45 Brilliant. This is the information I needed.👍
great video, thanks! I've made some of those mistakes :-(
However, I always keep track of the calls, expiration dates, and the extrinsic value of the call. If a call is in the money and the extrinsic value on the call is very low (increasing the likelihood of assignment) and I don't want to have the shares assigned, I just roll the ITM call out to a future month and probably also to a higher strike price. So I almost always avoid assignment by keeping track of the extrinsic value of the call.
On my long term holdings I try to sell Covered Calls on a High and then have stock pull back so I collect premium and do not have to risk having shares assigned nor buy back call at a higher price. Thank You.
Yeah I do that too. That way, you can close out trades within a couple of days for 30%+ profit. I’ve even closed out trades for 30%+ within the same trading day. Instead of holding the call until expiration, just wait for another upward move in the stock and sell another call.
Can you please explain more on this strategy?
One thing I do if trapped in that situation is sell the calls several months out for the higher premium, and as time passes roll it back and adjusting higher. The net might be just a small amount and only on one occasion did I pay a small bit to roll back and up, (like $50 I think) but the overall effect was that I got a higher premium than I would have selling the front month at break even strike.
I do the same thing.
Thank you.
Such clear explanation! 👏👏👏
I just want to put in my vote for more "mistakes" and downside videos, for the beginner investor. I know you want to highlight the great trades that your guys have done, and that's fine, but I'd love more exploration of the downside risks on those trades: the "what if the trade went against you" type of thing. In some of the previous videos, it wasn't so clear how you minimized risks.
ROLLING OUT is the true saviour to problems he listed
Seth has a vid that he never loses on a trade... his secret: rolling out (as many times as he has to until he's profitable - but he never rolls out at a strike price where he loses).
@@sulaymanbarrow7369it's just accepting a loss and making a new trade.
Dont kid yourself Bro.
Rolling out works eventually with indices. Stocks however can take you and your capital to capital prison for a long time. Sometimes a life sentence.
THIS IS THE VIDEO IVE BEEN LOOKING FOR!!!!! I found someone on CZcams who first explained this strategy. Honestly it sounded really good....got me thinking "Why doesn't everyone do this??" He kept explaining the Wheel, Premiums, Covered calls, Cash secured Puts, Strike Price, Profits, Potential Earnings, At the money, In the money, Out of the money...... But he ALWAYS breezed over and NEVER EXPLAINED THE PITFALLS!?!?!?! Which got me thinking this sounds too good to be true!!!
However after listening to your 5 rules and explanation this has RESPARKED a serious interest in this strategy to expand my portfolio and add a new way of investing. Thank you for Sharing your knowledge, I'm really looking forward to consuming more of your content.
Do you have a video you would recommend on how to analyze an Underlying stock for purchase?
Not sure which is better, the information in this video or Mike's hoodie!
Great lesson on mistakes!
Great explanation! Tks
Can you talk about rolling options forward, such as if the stock goes above the call strike price, instead of having them called away, you roll them forward to a higher strike price at a later date. Thx
Unfortunately, I done most if not all of these mistakes. This is an excellent layout of the mistakes that one can make. Thank you. Please can you make a similar one for cash secured puts as well. I'll probably be guilty as charged on that too, but would love the insights. :)
Superb video ❤
Any thoughts on executing a deep in-the-money covered call on (for example) AGNC for two years out and just collecting the dividend?
Thanks, Seth.....
Agreed on CC being primarily a Neutral to Bullish strategy. However: what if IV/HV is high enough and you are confident enough in the bearish movement of the stock in short term = is selling a slightly ITM Covered Call a decent strategy in that case??
A- you shouldn't own stocks that you are bearish on. B- selling covered calls on a stock that your are bearish on but don't want to or can't sell for some reason is a great way to offset the downside losses.
Thanks for the video. Question: If I have a stock that I sell covered calls on deep into the future, if the strike price is reached much earlier than expiration, will it be assigned early once the price is hit or do I have to wait until expiration? (To rebuy, etc.) Thank you. I feel this is another risk and I am new to these strategies.
Are there covered call campaigns that sell 0.42 delta covered calls? I would have thought most would to 0.10 or 0.20 at the highest.
Whoa Nellie! All of your examples assume you let your calls expire, if you’re running a “covered call campaign” you’re probably rolling out your covered calls-you’ve even recommended this in your other videos. And if you have to roll your call up and out, you still win: you pocketed all the extrinsic value of the first call, you keep the gain on the appreciation of the underlying, and at a new high your underlying has a good chance of retracing and you can roll the option for profit as the IV will decrease. And the first two “mistakes” assume you’re what, daytrading or swing trading the underlying position? Again, if you’re serially selling covered calls, you’re doing it on a position you’re gonna hold long term, through the ups and downs. Covered calls are for INVESTORS to increase cash flow, otherwise you’re an options TRADER. Otherwise it’s an adjusted “buy high sell low” campaign. There’s essentially only two mistakes: selling covered calls on a position you might sell, and letting your option get assigned. That’s it.
Great clip Seth. Thanks. I have been through all of the experiences. I have reduced the ccall strategy down to 3 cases. The key premise that drives each case is answering the question: what is my outlook for the stock? Once you can fairly answer that, the rest is a lot easier.... Thanks and Happy Easter!
I hope I have seen this earlier. but it's still not too late.
Isn't it possible to avoid assignment by rolling the covered call forward before expiration? In that case, what is wrong with selling a covered call on a stock that you are either super-bullish on or that you have a large, unrealized capital gain. Why not sell the covered call and (if need be) roll it forward month after month until it either finally expires worthless or you (eventually) have to purchase one month back at a loss?
1. If you're doing a CC strategy, you're holding a stock long anyways and for retail investors, you might be doing a dividend growth strategy. The stock going down is a bonus in my mind because that means the option expires worthless and I get to DRIP at a lower price. This worry only makes sense if you're buying a super sketchy, garbage stock, or you're pressured by short term gains and answer to wall street every quarter, otherwise, the stock will bounce back in the long run.
2. Who is going to reliably predict a stock that's really bearish from just regular bearish? Again, refer to 1) above.
3. So being a bearish on a stock is bad (your first 2 mistakes) and now being bullish is bad too? If you get assigned, just buy back the stock and start again. It's still a net win, even with capital gains tax. Want to avoid the assignment? Buy back the option before expiration and try again.
4. Same solution as 3) above: Buy back the option before expiration.
5. So never do CC on a stock that's appreciated for over a year? Again, buy back the option before expiration.
This video is bait.
In your outcome 3, how did you lose money on the shares, can't you just wait until they go back up in value before you actually sell the shares? Yes, it may be a while before the stock goes back up, but as long as it does, wouldn't that not be a loss then? Am I understanding this correctly?
What about rolling out of a covered call contract to reposition yourself? Rolling is to "key" to winning more consistently over the long term based on my years of experience! Great Video and great info!
Heck yeah! I sell options on Marathon and Riot bitcoin miners and BOIL etf. They're very volatile, so sometimes, I have to roll.
This video is biased. I think any investor can forget about sell any covered calls if they have to wait for all the ideal conditions mentioned are met. This is speculation at best. I dont have a crystal ball to tell me when the stock will go up or down, bullish or bearish. You are an opportunist. I hope you dont lose much.
Does SMB Capital members perform any type of technical analysis before selling a covered call?
If you're bearish sell an ITM call several months to a year out. The large premium will protect you against the downside risk in the stock.
Yes! if the iv is high, by selling long term ITM calls you collect a large premium which lowers your rolling net cost basis/ excellent long term protection that can replace the high costs go buying puts. Just calculate what return you can expect according to your target for returns. Look at the P&L chart: of course, you limit the upward gains, but with a major down ward protection : if you reach your planned return, without costly long puts: be happy.
Is the outcome #3 only in case you sold a covered call at $90 strike? I am new learning about options but to me selling a covered call is when I am bearish on the underlying and I sell above my stock purchase price and OTM strike. In case, as stated in ex #3, if I had purchased at 105, sold a covered call at $110, I will just keep the premium collected. Did I miss something? Appreciate the videos you make. They are very helpful and educational. Thanks.
What if you're in a stock that is very beaten down, but you suspect that future conditions will make it rally again. In the meantime selling covered calls at your cost basis would be pointless, yet couldn't you sell CCs at a strike closer to the current share price, while maintaining a stop-loss within the range of the premium you were paid in case it has a short-term rally (you would wait for high IV opportunities to sell)? The only real risk at that point would be early assignment. And of course, the best decision would be to not hold onto bags in the first place. 😂
In the last example, what's wrong with getting sold out at that kind of profit?
Can we rollout on super bullish stock on the day of expiration and get more premium? Please explain will it work.
I got caught in that TSLA drop and bounce that you reference. I was selling $180 puts when it was trading over $200. My saving grace was the fact that I was selling weeklies so had the ability to roll down my strike more easily. I got it down to the $152.50 put before getting assigned while TSLA was down at $120's. Started selling a $140 call only to watch it rebound. I got my call rolled up to 152.50 again and have kept it there, still bringing in an annualized return of 20% so far on the capital employed. Sure would have been nice to have been able to sell my $152.50 shares for $200+ on the rebound though!
So why didn't you keep rolling your calls further up?
@@Martinit0 Because it ran up 70+% in a few weeks. Didn't realize it would just keep going. I couldn't get a credit anymore without going way out, since it jumped so fast above my call strike.
I’m the last example. I have unrealized gains in 6 figures but I was thinking-if the price is getting close to the strike price, I can just buy and close the call and then sell again on a later date So I won’t be forced to sell my shares? I’m a newbie in options trading-any advise would be appreciated.
Weekly calls prevents getting swept up in most monthly spikes. If it does, take the cash and buy the stock again but fewer shares.
Best scenario is to do it on a big moat company that you’ve owned for years and r way up on. If u own 1000s of shares of apple dating back from 20+ years ago then ur not gonna worry about the stock temporarily going down during ur covered call timeline.
Here's another tip/ mistake to avoid while dealing with covered calls or short straddles: make sure you account for any impending event such as dividend declaration or investor meet during the life of the option because they tend to make your calculations go haywire.
So my question is about mistake 5. Why hold that cmg stock and do nothing with it. It doesn't even pay dividends. So u have 170k unrealized gains that doesn't do anything for you until u sell it.
I bought 100 shares of a stock at 47 dollars and sold a call way below my stock price at a strike price 32.50 which expire nov 17th 2023 I received a 1358 as a premium. As long as the price doesn’t hit 32.50 by nov 17th I’ll get to keep my shares and the 1358 ? I know if it hits 32.50 I’ll get exercised which means I’ll only lose 92 bucks technically
#5 is a great trade if the stock holder prefers to get out at a certain price anyways and picks up extra cash by selling the call.
For #5: The "deadly mistake" here is the unrealistic scenario of letting the trade expire. Why in the world would anyone do that? If CMG was getting close to expiration and was at e.g. 1805, you'd simply pay ~$500 to close out the trade. This would reduce your take from the call premium by $5, so you'd "only" make $3100 on it - but you'd get to keep your stock, so the tax event would not happen.
Exactly. I sell calls on my VOO holdings which I've owned for years. I have never let them expire in the money (which would create a big tax event). I'll roll them up and out. Occasionally I'll have to pay a debit, but I'm fine with that.
Eventually you are going to want to sell these shares for profit anyways right? So what's the big deal? You will be paying the big tax at some point.....
@@redrex0032 If I have good dividend-bearing stocks on which I continually sell CCs - eventually reducing my basis to zero and providing an income from that point on - why would I want to sell them? Given that I can also use it as collateral for a margin loan/PLOC (and let the growth in the stock pay for it), there are also plenty of other options... so to speak.
@@MrJeff1256 Facts and nothing but facts. 😊
@@redrex0032 Not if you want to carefully manage income and taxes. With an assigned covered call, you're forced to sell 100 shares at a time. But by strategically selling a few shares at a time, you can determine what income tax bracket you end up falling under.
You never lose money on a stock going down unless you sell it. Your covered call strategy can just be put on hold and you can pick it up once the stock price recovers. I know you would not advise being over leveraged in any position so the AMZN trade would make up 5-10% of your portfolio you could still sell calls and puts in other stocks. The calls you sold on AMZN could also be used to lower your cost basis. I would probably sell puts at that point to continue to drop my cost basis.
How did i lose anything at option 3? I wouldnt lose unless i sold my stock.
5 Deadly Covered Call Mistakes Beginners Make:
Mistake #1: selling a covered call on a stock when you are bearish on (bullish or neutral strategy)
Mistake #2: staying in a covered call position after you have turned bearish on a stock (get addicted to income)
Mistake #3: selling a call at a strike price slightly above the current price on a stock that you are super bullish on
Mistake #4: selling a call below your acquisition price on a stock, locking in a realized loss
Mistake #5: selling a call on a stock where you have a huge embedded unrealized capital gain
Thanks, SMB Capital. I always take notes.
Danny Tetreault.
Hindsight is always 20/20.
I personally only consider No.4 as a problem, but not a mistake.
As someone that lives in a gambling state, I would never consider a $5,966 profit to be a mistake. Sure, you could have made more money, but if I still made $6,000 on a Chipotle option sale, I would be jumping for joy.
Wellll if I am going to sell a high past gained stock anyway then I am going to get nailed for capital selling the shares at a gain but not if it is in my TFSA
In that first example, option 2 did you not just spend $10,500, to collect $850, and loose the difference of $10,500 - $850?
I'm new to options so I'm certainly not going to disagree with you but regarding the first two mistakes i.e. not selling call options when you are bearish. If the price goes down then the option expires worthless and you make the premium which offsets the drop in the stock price, effectively hedging. The only way to avoid the drop in stock is if you sell the stock before it drops which requires accurate timing, something most of us don't have. If you are investing in a particular stock long term then you surely don't want to keep selling and re-buying depending on month-by-month sentiment. Surely better to sell call options when the stock is trading sideways or dropping, to mitigate loss and/or make extra profit when your longer term e.g. 1, 2, 5 year outlook is bullish? This is why I had thought the covered call is mainly a neutral to bearish strategy, though obviously also valid on small increases in stock price. I'm confused!
When you described the “super bullish” on part 3, how do you know for sure it was going that high? The share price could’ve dropped just as easy. You have to make decisions based on the now. If everyone knew that their shares would sky rocket in one month, we’d all be billionaires.
It is very obvious, I figured it all myself.
I don't get it, why would you not sell covered calls on a stock you bearish on? I thought you didn't want your stocks to get called away.
The covered call is a bullish strategy. That's why. The fact you say you *don't want your shares called away* means you're actually bullish as you want to hold the shares. Why would you hold shares you think will stop in value?
But if you're not too bearish you could sell itm covered calls, so you get some protection in case the stock drops. But that means you definitely cap your possible gain to the price the stock was at when tot sold the itm call plus the small extra premium.
The point is that if you're bearish, why not simply sell the shares or buy some protective put while selling a call to cover part of he put?
Because you're better off protecting your capital by selling the stock at peak price instead of holding on stubbornly. If you held onto TSLA at $380 or AMD at $160 and held on while selling covered calls, you'd be in the red for a very long time instead of just selling the stock.
For the last situation, how can the trader make use of that unrealized gains? If they do that trade regularly, it would be worth it? They could take debt out against the gain, but seems like they'll eventually need to realize it.
Wow 30k for a 3k gain. I'm glad I watched this video.
I would rather make some money then “potentially” leave money on the table thinking it’s gonna go way up in price and not make anything at all. Just like the old saying in the stock market goes “you’ll never go broke taking a profit.”
Regarding #5: why hold on to a stock just because you're going to end up paying lots of tax on it? Isn't that just kicking the can down the road? You're going to end up paying that tax on it when you sell it anyway, right?
Mistake #5 I don’t understand necessarily, don’t you have to sell that stock at some point and pay that tax?
I don't understand why anyone in those scenarios would let themselves get their shares assigned, they could close their contract out or roll them as soon as the share price got too close to the strike price. What am I missing?
So the time of outcome #3 at 7:56 is what I want to comment on. So the AMZN share drops to 90 as the call seller. So id say so what. I dont have to sell anything and just keep it along with the premium of $350. I only lose share value if I sell it at 90 and no way Id do that if I paid 105.
I’m surprised you never mentioned not all stocks of candidates for a covered call, as they have no premium that’s worthwhile.
Rolling calls is king! Differ gains forever and as portfolio grows, sell more and more premium!!! You are welcome.
I’m confused by your last example, selling call on long term hold and having to pay the capital gains tax. What’s the solution? To realize the gains, you have to eventually sell, so why not get the option premium as a cherry on top to help with the taxes? You said it was bad, but didn’t offer an alternative. Plus you assume the seller was in the 20% tax bracket, for all you know he’s at the 0% rate. What else should be done? Sell half one year and half the next? Either way you still paying taxes…and the longer you wait you risk the stock going down and loosing your gains. Someone please let me know what I’m missing 🙏
if you are really bullish on a stock you can always buy more and still grab the premium
Why not roll when it gets in the money or close to it🙄???
Why can't one roll the covered call if it's in the money ?
to be honest the last point about tax is fair, BUT, unless you plan to give that to your children and never sell those stocks, you'll have to pay taxes sooner or later on those stocks.. so whether you do it now through selling calls, or just by selling the stock for whatever reason, you'll be paying those taxes anyway.. so it's a pitfall.. yes and no. But it's good to be aware of it and possibly time it better to lower your taxes etc and get in touch with someone that can help you reduce the amount of taxes you pay etc.
My brokerage won't let me sell naked calls. Is there a brokerage that is more liberal than Schwab in allowing option trading?
I never go out more than 1 or 2 weeks.