imagine being able to double your covered call returns while only using 25% of the capital that you normally use you're going to learn how to do just that in this video I'm Seth freyberg and we are one of the top proprietary trading firms in the world with numerous 7 and8 figure Pere Traders you've found the right place to learn all right so in today's lesson we're going to be discovering first of all what call options are and how they work secondly how something called covered calls work and how they can be used to extract income from stocks you own even if the stock you own doesn't issue any dividend at all and finally we're going to be showing you how to double the return on your covered call income through a very simple and easy to understand tweak as I mentioned one of the strategies traded on our trading desk here at SMB is known as the covered call and the covered call is a favorite not only of equity Traders at prop firms like ours but also retail options Traders and investors all over the world and one of the reasons investors and Traders enjoy trading covered calls is that they create a way to earn income on stocks that don't issue dividends at all or perhaps issue a very small dividend the covered call allows you to earn income from Investments that would not normally provide income now to understand how covered calls work we need to make sure that you understand how call options work and if you're brand new to options trading and you don't know anything about call or put options and how they work we've created a video for you to understand options Basics and if you click the video appearing on your screen right now it will lay the groundwork for your understanding the covered call strategy which we're going to be teaching you in this video Then when you're finished you can come back and watch the rest of this video now i' like i' like to remind you that your broker actually will allow you to buy or sell options and when you're buying an option obviously you pay cash and so you're considered long that option and when you're selling an option you receive cash so you're considered to be short that option covered calls involve selling call options on stocks that you own and collecting cash for selling those calls to call buyers what is a covered call exactly and a covered call is really very simple a covered call is comprised of 100 shares of stock that you are long presumably shares you've bought and one call that you sell at a strike price that usually is at or above the current stock price that combination those 100 shares of stock and that short call typically above the current stock price that is what is known as a covered call all right so there are two possible outcomes of a covered call the first outcome is when the stock closes below the strike price of the call on the day it expires and so in that case if you are the person who has entered into the covered call trade and if the stock expires at a price below the strike price of the call then you just pocket that premium that premium you were paid initially for selling that call you just pocket that premium that becomes profit for you the other case is if the stock closes above the strike price of the call and in that case then your 100 shares are automatically sold to the call buyer at the strike price regardless of how much higher the stock is than the strike price so those are the two outcomes you either pocket the premium or you by the way keep the premium in the second scenario but your Shares are gone and they've been sold at the price of the strike price that the call buyer has purchased back in 2022 you all probably painfully remember what a consistently bearish Market that was pretty much from the beginning of the year through to the end of the year the market had sold off down about 20% 2022 so most people turning the page uh on 202 23 at least considered the possibility that the market was going to have a bounce and Rebound in 2023 so let's say that on January 20th of 2023 when the Spy closed at 395 all right let's just say on that day that you went out and bought 100 shares of spy on that day at 3.95 and at the same time you went out to an options chain for spy uh which expired about a four months later uh in May of 2023 and you went up about 7.5% above the current price of 395 to the 425 call strike price and you see that call Price there is $535 and so you went ahead and sold one of those against your 100 shares of spy that you bought that same day so let's see what this means from a cash flow standpoint and first of all you bought 100 shares a spy and you paid $3.95 per share for those so that is going to cost you 395 uh you also sold the 425 may call at at a price of 535 and of course uh each option relates to 100 shares of stock so you multiply by 100 and you end up with a uh cash credit of $535 for having sold that 425 call resulting in net cost of 38965 let's move to the day that that option expires and as you can see the market did in fact rally uh it rallied up from that 395 original price to 41862 on the May 20 expiration and so with a spy closing at 41862 let's take a look at the profit on that covered call through that May 20th dat and with spy closing at 41862 we can now calculate the profit of the covered call through May 20th 20123 and let's start with the value of the shares we own well those have now uh gone up in value to 41862 per share so the value of those is obviously $ 41,8 62 the 425 call well that one actually has a zero value on the day uh that the that option expires because spy closed below 425 so that right to own spy shares at 425 is obviously worthless because you can go out and buy them in the open market for 41862 so that call dies uh has zero value and of course to calculate the profit you got to subtract out the original uh cost of the trade which is $ 38965 as we showed you before so the result is to date the covered call uh is up $2,897 now let's say as many people like to do that we would like to continue our covered call campaign so we're going to go out another 4 months this time to September we're going to again go 7 1.5% above the current spy price which uh at 41862 7 and a half% above that is approximately 450 so we're going to go to that 450 strike you can see that the price that day was $31 so now let's update our cash flow calculation on the covered call campaign because now we've added a short call Cash inflow coming in from that September 450 call so again uh we paid the 395 originally for the shares we sold uh the 425 call for 535 we went over that previously now we're bringing in a new $31 for the September 450 call so now the net cost of our program is actually down to to 38664 it's reduced a little bit further because we got in that $31 for selling that $450 call all right so our net cash outflow is 38664 as of the entering into that uh September 450 call which took place in uh May immediately after the may call expired now we're going to move forward to September of 2023 and as you can see the Spy continued to rally and it got to 443 37 by the day of the expiration of this second call that we sold as part of our covered call program and so with spy closing at 4433703292 7 because the Stock's up to 443 37 you multiply that by 100 you get to 44 337 we subtract out the value of the 425 call which we we mentioned before was Zero but now the September 450 call is also zero for the same reason the stock closed below the strike price of the call so that one goes out worthless also meaning and then of course uh we subtract out the net cost after having sold both the 425 and the 450 calls the net cost as we mentioned earlier was 38664 and so you subtract that out of the current value of the shares and the final trade profit is $5,673 which constitutes a 14.67% return in 9 months which is very solid that is a traditional covered call campaign and most people would be very happy to make 14.67% in 9 months there's a problem here right what if you don't have that initial close to $440,000 in your account what if you only have $10,000 in your account right are you just out of this trade is this campaign Out Of Reach for you and the answer is no it is not Out Of Reach for you if you execute a synthetic covered call you can get into this game so let's show you how that works and let's explain to you what a synthetic covered call is and the best way we're going to do that is by going ver back to the very beginning of the year and starting all over again but this time executing this trade as a synthetic covered call as opposed to a conventional covered call so again we're back on January 20th we're back in time the Spy has closed at 395 and this time again no different than before we're going to go ahead 75% above the market price of 3.95 so we're going to be up at 425 and we're going to sell that 425 call expiring in may just like we did before for the exact same price obviously for 535 but this time instead of buying the 100 shares of spy like we did simultaneously with the selling of the 425 call in the conventional covered call example instead of that we are going to go down the options chain in what options Traders call deep in the money down to 310 and we're going to go very far out in time to January of 2024 so almost exactly a year later we're going to buy one of those 310 covered calls so now we're 85 points below where the Spy is trading our strike price is uh 310 and we we are out in January of the next year 12 months later this option that is one year out is known as a leap it's called a leap option and that leap call option is deep in the money meaning it is a strike price that is 85 points it can be any amount but very deep in the money such as 85 points in the money below the 395 price in this case at 310 that is called a deep in the money leap call and we are buying that uh basically 12 months from when it expires and its price is 10136 now you'll see shortly how this concept replaces the conventional covered call so let's first go through the cash flow so you understand what's happened here we paid remember 10136 for that leap that 310 leap in January of 2024 and we paid 10136 for that again every option price must be multiplied by 100 because each options contract represents 100 shares of stock so in this case we pay $1,136 for this 310 call remember we spent 33905 for the uh shares but when we buy this deep in the money call were only paying $1,136 again we received $535 for selling that $425 call we discussed that before and so when you net it all down you end up with a net price for entering this synthetic covered call of $961 first of all it's important to notice we have just entered a covered call trade at 25% of the cost of the conventional covered call the synthetic covered call literally gives you a 75% discount in terms of the amount of capital the amount of cash outflow from your account that has to take place in order to enter this trade so that's very important that means you can mimic the conventional covered call trade with having much much less in your account in this case close to 75% less again we're GNA we're running through the same trade but this time we're applying a synthetic covered call to the price action of spy so again on the May expiration the Spy Clos at 41862 as we discussed let's analyze what's happened here you see we were short that 425 call and that's expired worthless for the same reason as it did earlier it expired well above where the Spy closed on that day right but that long option that 310 that still is in existence and will continue to be in existence for another 8 months until January of 2024 so that hasn't expired and in fact its value has significantly increased because a deep in the- money call this deep in the money its appreciation will be almost as quick as the appreciation of owning the shares themselves so this deep in the money call has increased to 11849 its value is up tremendously from its original value when we bought it let's see where we are profit-wise through May on this synthetic covered call campaign so again remember we now start with the only thing that's remaining and alive at this point in the trade which is that January 2024 310 call and that one one is worth now having gone up to1 1849 it's now worth $1,849 and the may call as it did in the previous case expired worthless right we subtract out the original cost of the trade and so far in the campaign we're up $2,535 we now as we did previously resume the campaign and that involves going out to September 4 months later again up 7.5% from the current price find that strike price which is up 72% which is the 450 just like we did before and just like we did before we sold this for $31 let's take a look at the current cash flow of the campaign before we look at its conclusion so remember we bought that original call for uh 10136 so that's 10,136 in cost to us we subtract out the 535 we received for the May 425 call and we subtract out the $31 we uh received for the September 450 call and when we net it all down it comes to $9,300 at this point in the campaign so that is now our effective cash outflow for being involved in this synthetic covered call campaign the second call the September call at the 450 strike price that one again expires worthless in September 2023 because the Spy closed well below that at 443 37 we again have a call that we've sold that has expired with no value but we still have the long call which has now four more months of life before it expires in January and as I mentioned earlier when the call option is this deep in the money it will appreciate at approximately the same rate as the underlying stock is appreciating and therefore in this case it's way up from the price we paid for it originally it's up to 13826 on the same day that that short September 450 call expired and so we're now in a position to do our final profit calculation of the synthetic covered call campaign as of the expiration of the second covered call on September 15 2023 so first off that 310 January 2024 call which is still alive until January of 2024 that one's worth 13826 as we just said so when you multiply that out you end up with a value of 13826 for that long call which is the only part of this trade which is still alive as of September 15th the May 425 call expired worthless the September 450 call also expired worthless meaning that once we subtract out the net cost of The Campaign which we have seen is $9,300 we end up with a final trade profit of $4,000 $526 which is a 32.731937 in 9 months more than twice the return on the conventional covered call so now let's wrap this up by contrasting the conventional covered call with the synthetic covered call in this example starting with the covered call we our net cost was 38790 and our cash profit on the campaign as you saw was 5,673 which is an 8mon return of 14.67% which provides you with an annual return if you were to annualize it and assume you you have the same results for the full year is 22.05 per. whereas in the case of the synthetic covered call your cost is less than 25% of the covered call 9314 your cash profit is not that far off from the cash profit you got from the conventional covered call in this case 4410 and so with such a great return compared to the tiny amount of capital you had to expend on the synthetic cover call it's no wonder your eight-month return is 32.731937 people prefer to use the synthetic covered call not only because of its terrific returns but also because it requires just so much less Capital it should be no wonder that a synthetic covered call is a popular strategy among uh professional options Traders and now you've got the knowledge to apply synthetic covered calls to situations where you might have previously used a conventional covered call if you'd like to learn three more option strategies that our prot Traders use including the 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