How to Trade Covered Calls Effectively

Jul 19, 2024

How to Trade Covered Calls Effectively

Introduction

  • Most traders struggle with trading covered calls effectively.
  • Video aims to teach 3 key strategies to significantly improve returns.
  • Presented by Mike Bella Fury and Seth Freyberg from S&B Capitals in NYC.
  • Goal: Help traders grow their trading accounts.

Basics of Covered Calls

  • Traditional Covered Call: Buy 100 shares of stock, sell a call option on those shares.
  • Outcomes:
    • If stock closes below strike price: Trader keeps the premium.
    • If stock closes above strike price: Shares get sold at the strike price, plus the premium is kept.

Key 1: Avoid Trying to Squeeze Every Penny

  • Reason: Trying to maximize every last penny is counterproductive.
  • Example:
    • Trader owns 300 shares of Apple.
    • Implements a quarterly covered call program.
    • Makes a profit but can be optimized further.
  • Optimization: Consider closing the calls early when they lose about 90% of their value.

Key 2: Use Deep In-The-Money Calls

  • Theory: Use deep in-the-money calls instead of buying shares outright.
  • Example:
    • Use of synthetic covered call strategy.
    • Buy deep in-the-money calls with long expiration, sell higher strike calls shorter-term.
    • Produces higher returns with lower initial cash outlay.

Key 3: Sell Calls at Your Price Target

  • Recommendation: Always sell calls at your price target, not just at the highest premium.
  • Example:
    • Tesla stock example showing more profit when calls are sold at the price target versus the highest premium.

Summary

  • Covered calls are effective but can be optimized with professional techniques.
  • Employing strategies like early closure, deep in-the-money calls, and correct strike placement increases overall returns.
  • Encouragement to learn more advanced options strategies.

Additional Resources

  • Registration for a free workshop on three more option strategies.
  • Link provided to an options class.