hello and welcome everyone my name is
cameron may
it is four o'clock eastern standard time
the closing bell has just sounded
it's tuesday and that means it's time
for generating income in your portfolio
and i'm really looking forward to
today's discussion
we're going to be taking a look at what
may be the most commonly employed
options strategy by self-directed
investors for the pursuit of an income
in the self-directed portfolio and it
might be used as an alternative
in a low interest rate environment we're
going to explore the pros and the cons
go to place that hopefully everyone can
follow
so we're going to dive straight into it
as we do that let me say hello to
everyone who's joining me today we have
james boyd if you haven't noticed this
another one of our great education
coaches standing by in the chats to help
out
with any questions that may arise that
i'm not able to address during the
natural fall of the presentation of
course you can feel free to ask
questions i'll try to get to as many as
i can but james will help us pick up the
slack there
but i see a lot of you veterans already
chiming in over well yeah we have about
200 people in the webcast right now so
hello there canyon osborne
sean angie paul tom pat daniel larry
uh donna robert mira who else is here
tony dariel aaron i
can't say hello to everybody but hello
all of you returning veterans welcome
back
and if you happen to be here for the
very first time i want to welcome you as
well if you'd like to chat in and say
hey i'm a first timer here
i've never seen you before welcome i
always like to see who my new
uh my new audience members are and if
you're watching on the youtube archive
after the fact enjoy the presentation
but be aware that you're invited to join
us live
four o'clock eastern standard times when
we kick things off on tuesdays
and we don't ever go beyond 45 minutes
so this is one you don't want to be late
for
all right so let's get right into it the
very first thing that we'll do
is possibly consider the risks
associated with investing risks are real
so some important reminders
first of all the following presentation
is for educational purposes only
as any investment decision you make in
your self-directed account is solely
your responsibility
all investing involves risks including
risks of loss
options which are the topic for today
are not suitable for all investors
the covered call strategy can limit the
upside potential of the underlying stock
position
and pardon me trades involving minimal
potential benefit can also be
significantly impacted by transaction
costs
and any probability analysis results
shown i might get into that
are theoretical in nature all right hey
daniel says he's a first timer
great to have you dano
hi there your first timer jahia hello
and lh and john yeah i think this is
going to be great
let's get right to uh our agenda for the
day we have three items on the agenda
and this is what we do in a typical week
all right so if this is your first time
here we meet every tuesday we meet for
about 40 minutes
sometimes up to 45 and we just talk
about income strategy
uh income strategies for self-directed
portfolio
it's never a sales pitch for a
particular strategy it's always an
educational discussion but here's the
typical layout we're going to do
a quick review of what's happening in
the markets to provide some context for
the discussion
then we're going to get into today's
strategy discussion which is covered
calls for income
and we're going to wrap it up with an
example trade so it's not
just all about theory we theory will
also include application
so hopefully we're able to connect the
dots for everybody and everybody goes
home with it
with a better understanding in this case
of a strategy called
covered calls all right and i'll also
give you a little bit of a teaser a
little bit of a spoiler alert here today
we're going to be working on the
timing of when to take a a position like
a covered call because an investor
may be asking themselves hey cameron uh
or
hey self-directed investor when do i
look for
income from let's say a stock position
and when do i just get out of that
position's way and hopefully
just let it do its thing and my screen
take a peek at what's going on with the
s
p 500 we're going to be using the s p as
sort of a stand in for what the stock
market has
has been doing but obviously there are
other indices that investors might use
to get a gauge for things
this is going to be our stand-in though
so yes we have exceeded those
pre-covered
all-time highs so for the last six weeks
or so we've been in uncharted territory
we've been pushing up through that level
but
i want to take a look at these last
several weeks preceding that breakout
point okay so let's zoom in on this
period so i'm going to click and drag
off to the left there and i just want to
notice sort of the ebb and flow of
recent price activity on the on the us
stock markets and you'll notice with the
s
p we start and this is going back to
about mid-june
ran up at a nice advance and then a
period where we
where we sort of drifted for about a
week and a half
and then we ran up relatively
proportionate to the previous events
and then we drifted for about a week and
a half and then we ran up
relatively proportionate to those last
two advances
and then we drifted for about a week and
a half and then we ran up
against again what do you know
relatively proportionate do you see what
i'm saying
we've been running up and pulling back
now some people are saying we've been
hoping
for creating an income with stocks and
sometimes that is what we do
and this is actually an income strategy
built around stocks
stocks are really lay the foundation for
this so if you're not familiar with this
i still could again it's not a sales
pitch just a discussion
it could serve that purpose um
i did cover uh
defining and scanning for income stocks
meaning dividend stocks but just two
sessions ago
so you may want to come back and check
out that that
webcast okay now finally look at this we
had it
we had the markets drift sideways once
again about a week and a half about
we're talking about
six or seven trading days and then we've
advanced so as we look at that look at
what i just draw a drew on the charts
this is something that some investors
might do with their market analysis they
might
study recent ebbs and flows the
breathing in and breathing out of the
markets
just to help them with any near-term new
new investments or trades that they
might be planning
because in this case let's just assume
it's not a guarantee
markets can do whatever they want but
let's say the markets have already run
up some distance
relatively equal relatively equivalent
to the last
four upswings and maybe the investor is
thinking you know maybe for another
week and a half ish stocks aren't going
to accomplish much maybe they go down
maybe they go sideways but in any case
maybe this isn't a time to be looking
for appreciation
now did i just say that's exactly what's
going to happen no i'm just saying
let's assume that we're thinking this
may be the case
all right so what are we to do well this
is a class that's all about income
maybe if appreciation is not
directly on the table maybe it's an
opportunity to go do something else
so if we have a stock portfolio what we
might do
is look to those stocks to generate an
income for us
now obviously some stocks pay a dividend
and that is the topic for discussion
in some of our and start of our tuesday
afternoon webcast
today though we're going to take a
little bit more of an active approach
in pursuit of an income from our
existing stock positions
and we're going to talk about the pros
and cons of that approach okay
but as a stock investor as a stock owner
i should say
in the usa exchanges it's quite likely
that there may be other investors who
are eyeballing that stock that you have
and they might be thinking themselves
you know what i might be interested
in buying that stock obviously this is
not exactly the internal dialogue that's
going on with everyone
but theoretically another trader might
be interested in buying your shares of
stock but maybe they haven't made up
their mind up yet so they may actually
be willing to
pay these the owner of shares of
optionable stock for the right to
maybe buy their stock we call that an
option
it's the option to buy their stock maybe
they just want to think about it for a
while
so let's use an example stock to explain
this strategy all right so i'm going to
bring up
symbol wmt it's walmart what has walmart
just done
look at what walmart just did walmart
just exploded upward
what just happened over the course the
last five days what's been the news
anybody went following that on walmart
if you want to chat that in as you chat
that in though i just want to go back
and look at history this is a big move
but it's not entirely unheard of in
recent history
for walmart we can see somewhat similar
moves back here
and back here it does represent i think
it is it's the single largest um
dollar upswing for the year for walmart
but
not by not by a wide margin
but let's suppose that an investor in
walmart
just sees this and they say oh yeah so
navigator says earnings yep earnings are
right here in that rear view mirror
that's what this little icon this double
icon with the
light bulb and the telephone means the
one just before that dollar sign means
that there was a dividend paid here so
hey is this a dividend stock that maybe
an investor
has purchased to collect a dividend yep
but they have some time to wait before
the next dividend
last one was paid middle of august so
september october middle of november is
when we might be expecting that next
quarterly dividend
but yes okay so there are a number of
things happening here
nick the offer to buy tick tock and what
else
or or proposing
what else they have that new membership
service i don't know if you've heard
about that it's called
walmart plus apparently set up to set
them
to to establish them as a competitor for
let's say amazon prime
i'm not an expert in that i certainly
i'm certainly familiar with
amazon prime i'm only right now
peripherally familiar with what that
walmart plus offering is
apparently you subscribe at an annual
for an annual fee and then you get
services
you get uh free shipping your house and
other things like that
but yeah whatever it is have investors
gotten excited about something in
walmart
yep they've actually driven the stock up
uh pretty sharply in just one trading
week
now for some for some shareholders they
feel like oh that was fantastic
however might there be at this point
maybe some concern by some shareholders
that maybe there's some profit taking
a lot of money was just made essentially
overnight not exactly overnight but
pretty close
well that that outlook for prices to
maybe
just falter a little bit may again get
that that aligns with let's say an
outlook a similar outlook on the s p
500 where the appreciation has already
happened
what else might be done with a stock and
this is where an
income strategy might be employed
so we're going to use that income
strategy let's so
let's say that we already own 100 shares
of the stock okay this is required
for this strategy so we're going to call
this our example
trade and we're going to
labor label it a covered call it'll
explain why it's referred to as a
covered call
in just a moment this is a strategy
known as a covered call
and we're doing this explicitly for
income okay
yeah now uh g franco is saying are there
other things that we could do if we're
really convinced it's going to go down
can we get into other more bearish
strategies we could yeah
and even those i will sometimes cover in
my other webcasts i don't do it here
because it's not typically done for
income
but here's what a covered call is
we own 100 shares of stock right now
it's trading
at 147.50 okay
i'm just going to make a note of that
because we're going to we're going to
use that as a reference point to compare
and contrast the relative wisdom the
pros and the cons of this of this
strategy
right but i'm going to go to the trade
tab
and what i'm going to look to do here is
get into a
a contract with another investor where
i'm essentially giving them the right to
buy my shares or this theoretical
investor in walmart is giving
another investor the right to buy their
shares of walmart
at a fixed price for a fixed period of
time
now the way that walmart has been been
behaving in the end
the market and at large remember the s p
runs up and then it's been pulling back
for
like a week and a half so let's say it
takes a couple of weeks before it's back
up to its pre pre-drop
levels and then it's advancing again and
then maybe that
maybe the markets have shifted back into
appreciation mode
but for a couple of weeks there we're at
or below a break even level
on the s p and let's just suppose that's
about our
outlook for walmart okay
so i'm going to go to my trade tab and
let's start to structure
this trade this agreement with another
investor and again
for a covered call this is how it works
let's say that i am trader a
i and again this is hypothetical i own
shares of walmart
but i think it's just going to be
stagnant at best for a couple of weeks
so i'm going to get into a deal with
another investor where they
have the right to buy my shares from me
at a fixed price
but in exchange they're paying me for
that right or paying this investor for
that right
right so with the stock trading around
147.5
what if we were to look at like 150
you'll notice right down the middle
of this page we're on the trade tab
we've entered walmart and we're down
here under the option
chain there are a number of
prices known as the strike price these
are the price at which we could strike a
deal
to agree to sell our shares of walmart
to another investor
okay that's why we call it a strike now
you'll also notice that this contract
this is a deal that lasts for the 18th
of september the 20 stands for 2020
and that means that's a 17-day contract
and finally you'll notice the number 100
appears here if we get into a contract
like this it's going to obligate us
to deliver 100 shares of stock that's
what the 100 is
okay so those are the terms of the deal
so what if we were to eyeball let's say
the 150 strike so here's what i'm going
to do
and then i'll explain why we're doing it
so we're going to sell
in this case the 18th of september
150 call
and that looks like that's trading so
150 is our strike price
and it's trading right now between 4 30
and 4 35 i'm just going to call it 4 30.
okay we're selling that 18th 18th of
september 150 call for 4.30
all right now if that just went over
your head let me explain what this deal
is
so we have trader a i'm going to put me
in that scenario
i own the shares of walmart and we have
trader b
trader b just theoretically paid me four
dollars and 30 cents
per share
in exchange for the right to buy my
shares at any time entirely at their
discretion
for 150 per share
all right and that right extends that
contract is good for them through the
18th of september
so wherever wherever uh walmart goes
from here
they have the right to buy 150 shares
from us
so what's it what's in it for us
we know they have the right to buy our
shares well we got four dollars and
thirty cents per share
on a hundred shares or in other words
how much of a
theoretical income does that provide
that's 430 dollars now
430 dollars on a 147 dollar stock
so that net position if we owned 100 100
shares of
stock that's about a fourteen thousand
seven hundred dollar
position and a four hundred thirty
dollar income on fourteen thousand seven
hundred dollars is
pretty close to three percent
hey three percent income
wouldn't be bad if you were getting that
in a money market over a course of a
year
but this is for how long
three percent in 17 days okay
so much higher income potent income
potential however
there is uh there's a significant
trade-off here
if we're if we have our money parked in
a money market there's not a lot of risk
aside from maybe
um inflation there's obviously
uh missed opportunities while we have
money parked in cash
but for a trader who has gotten
themselves into a deal like this
sure they got paid 430 bucks for four
dollars and 30 cents per share
but now we need to propose some what if
scenarios
where can the stock go from here let's
go back and help
visualize those that are new to this i'm
going to clear off this whole drawing
set
and i want to draw a line right there at
fifty dollars
that's going to be right here okay
that represents our contract price
okay i also want to go out to the 18th
of september
and draw a vertical line and this is
going to be a different
reference point that's going to be the
expiration date of our contract
right now what are we expecting the
stock to do we think that
it's right here and we think it's likely
that it might pull back at least
theoretically for this discussion
all right but is it guaranteed that it's
going to go down no let's talk about
what might happen if it goes up first
because there are a few things that can
happen with this trade
if the stock goes up let's say it goes
up here and it's above 150 and then we
hit that expiration date
okay what's going to happen
let's say the stock's up there at 155.
if the stock's worth 155 let's review
the terms of this deal
if the stock's at 155 dollars hey there
gary
you say you're late nope you're exactly
right you say better late than never for
those who are new to this webcast
i completely agree with gary's
sentiments if you can't make the
opening minutes pop in and if you happen
to miss the whole thing you can catch
the webcast on an archive after the fact
we archive the vast majority of our
webcast so if you're new to td
ameritrade that's one of the cool things
on our channel to the trader talks
webcast from td ameritrade channel
you can catch all the archives from our
previous webcast with a few exceptions
some of them don't get
archived for one reason or another but
um
make sure you do me a favor though if
you are new to here subscribe to our
channel you get
it makes it easier to follow what we're
what we're delivering here for you
in any case if the stock is up here at
155 and someone has the right
to buy the shares back or buy the shares
from us
at 150 are they going to do it
especially the clocks ticking they're
running out of time
yup once we get to expiration
every contract that is below the current
price in other words any any contract
what we call that is what we call in the
money those things are
exercised and the contract is what we
would be call assigned
what we would call assign from our
perspective and the shares would be
sold for 150. gary
you binge watched our archives over the
weekend that sounds pretty
pretty fun to me okay cool terry you're
totally new
excellent all right uh but yeah the
stock is worth more than what we're
agreeing to sell it for
we better plan on it being sold now is
that a tragedy
i don't know if we're comparing it to
day one
well we owned it we it was 147.59 on day
one we wound up selling it at 150
that's actually profit on the stock from
day one
plus what else we do have another
430 in the account that was already paid
so we sell the stock for 150 we tack on
430
in additional now realized profit
and it's almost as though we sold the
stock for 150 430
which isn't bad it's like we're forced
we're being forced to take a profit
however the higher it goes from there
the more upside potential
we're surrendering that's the trade-off
for this sort of an income approach
right it's that it's that upside that
we're selling off to someone else
so what else could the stock do let me
just let me examine
another potential scenario and remove
this drawing and let's just say it it
goes down it goes up but it's pretty
much
sideways and it's right where it was on
day one and we hit the
we hit the expiration for this contract
so
navigator says so you need to always
have at least 100 shares of stock before
doing options right
actually for doing this strategy the
answer is yes for
most options strategy the answer the
strategy is the answer is no
okay it's a good question though yep
nelson welcome glad to have you as a
first timer i hope everybody's
putting this webcast in their calendar
for next week
because we do this every week we just
look at different strategies we look at
different things we weigh the pros and
cons and
maybe you learn something really cool
you didn't know about and it helps you
understand the markets better so random
says so if the stock goes
over 150 we earn god so
we already on day one have 430 that's
been paid to us one of the one of the
deals about options is once we've
collected that forward
that 430 no one has the right to take
that money back from us
we might choose to spend it for one
reason or another
but uh no that that money is paid up
front that's
our income and then what happens with
the stock
is another variable okay
so the stock goes up here and we hit
that expiration date
better plan on the shares being
purchased
for 150 in addition to the 430 were
already paid
i remember when i was new to options and
i thought okay so i get 430 right now
and then
if the other investor decides to buy my
shares at 150 do they just pay me the
balance
so that would be like  155
70 or 150 140 570 no no
they pay another 150 per share
in addition to the 430 it was already
paid
all right so what if the stock just goes
sideways and it's still trading you know
around 147
148 something like that if someone else
has the right to buy our shares for 150
but the shares are only worth 148 even
if their time is running out and even if
they paid for that right
are they going to do it nope now
again they can if they want to it
doesn't make mathematical sense
they can if they want to but in the
majority of the cases
i would say probably the vast majority
of the cases the that investor just says
you know what cameron
keep my four dollars and 30 cents i
don't want your stock anymore
not willing to pay 150 for something
that's only worth 148 or 147
so they leave us with our shares and
they leave us with our four dollars and
30 cents
so we just keep the payment we're off
the hook
the trade is over and we now have our
income
and our stock so that's what could
happen if the stock goes
sideways so think this through so if the
stock went up we sold the stock for 150
plus we had 430 in income that was a
profit compared to day one
if the stock goes sideways we still own
the stock which is breaking even
but we also have the income so we're
ahead of the game
again well what if the stock goes down
okay lawrence says what's the character
of the 430 gain assuming i held the
shares long term uh you are you talking
about the taxable consequences of the
of the strategy here lawrence i can't
get into the taxation of strategies
you actually have to talk with your tax
preparer do i know the answer that
yes but can i
discuss it nope i'm not a i'm not a
licensed tax
preparer okay
what else can happen with this well
let's again remove this sideways drawing
let's kind of kind of zoom in a little
bit more maybe we get a closer look what
if the stock goes
down and we get who knows we're down
here
let's say we're down around 140 at
expiration let's talk through the logic
of this
on day one someone paid us four dollars
and thirty cents per share
for the right to buy our shares for
for 150 bucks if the shares are only
worth 140 at expiration are they gonna
are they gonna buy those shares from us
no they're gonna say cameron
keep your stock i'm not paying 150 bucks
for it
and they don't have any say in this i'm
also keeping their four
dollars and 30 cents so we retain that
in the account so they walk
and they leave us with the stock all
right so we have our income which was
the purpose
for doing this trade in the first place
the stock went down
yep we kind of saw that coming
so that was sort of what we mentally
assigned as a sunk cost
but let's let's do recognize the actual
impact
if the stock has gone from 147 and a
half on day one
down to 140 we have about a seven and a
half dollar unrealized loss on the stock
that we anticipated
from day one but we've
largely offset that with our four dollars and
30 cents of income so we've taken a lot
of the sting
out of that pullback on the stock and a
pullback on a stock
is just it's just par for the course
with stocks right look what the s p has
done over the course of the last
several months and you can see that that
is not unique
it there tends to be that ebb and flow
that stair-stepping pattern
to stock prices as they're moving
generally upward or generally downward
so this is a strategy that's sometimes
employed
let's switch back here to walmart it's
sometimes employed by
stock owner who thinks you know what
it's about
the stock looks like it's about to hit
the brake
the brake pedal for just a moment so
maybe i'll use that as my income
opportunity
so in this in this bottom line scenario
let's let's do the precise math here
stock goes from 147.59 down to 140.
we own it that's a 7.59 hit
unrealized loss on the stock versus
4.30 of income from the option
so overall how did we do well we're down
about 3.29
but that's a lot better than being down
7.59
right so this is that income strategy
that can
theoretically be used at times when we
think that stocks are getting maybe a
little bit top heavy
all right so i want to
just quickly address some of the the uh
terminology here
covered call why is this called a
covered call strategy have anybody
been asking themselves you're saying
cameron you just explain the strategy
but i don't know why it's called that
well in the old days we did this over
the phone this is one way that i think
about it
we would have done this over the phone
this was actually even pre-dating my
time on
in wall street uh i started in the mid
90s
as a full-service stock broker i got
into being a margin analyst and a risk
analyst and a trader on
options trade desk and all that but um
but back in the day we didn't have
computers to do this
so we would have done it over the phone
maybe someone had the right to
call us and demand our shares of stock
hey cameron i'm calling for those shares
and in return i might say oh that's okay
you want the shares
i got you covered now the share's right
here it's a covered call
louise you like that perfect okay
so i would suppose there are at least
some people saying hey cameron so why
did you do
150 why didn't you do some other why did
you strike a deal at
a different price well we might have
done that what if the trader wanted to
give themselves
more upside wiggle room let me
actually let me get rid of one of these
drawings here let's right click
get rid of this one drawing
what if i wanted to move my line up
let's activate this line push it up here
and instead of being obligated to sell
my shares for 150 maybe i
i don't want to sell them for 150 but
i'd be okay selling for 155.
well that trader if i if i were offering
that deal
the other investor is going to say hey
pay 155 that's going to cost me more out
of pocket so i'm not going to pay
you as much as as an incentive if we
were to go back to our trade tab
let's look at the 155 call that's not
trading for 430 or 435 that's trading
for more like 285 or 290 or two
or three bucks so maybe instead of
collecting 430 maybe we get like two
dollars and ninety cents for that deal
we're requiring the other trader to pay
us more for our stock
so they're going to pay us less in
income up front
there's a trade-off there right
but i think it just makes sense however
that income two dollars and ninety cents
on 147 dollar stock is still about two
percent
income in
17 days if you annualize that
you know that adds up to a significant
annual
income potential we have to always with
each one of these trades though
weigh the pros and the cons what are the
risks what are the advantages
the risk of this is that we're
surrendering the upside potential
whatever price we choose to get into a
contract to sell our shares for
we don't get to participate in any
profits above that so whether it's 150
or 155 we have a cap on that
potential but the reward there
for surrendering that upside potential
is 4.30 cents per share or 2.90
per share and that money is paid on day
one
and it is the investors to do with what
they will
from day one okay so we can choose a
different strike price
if we're willing to sell a lower price
we could maybe even collect a larger
income weighing pros and cons
okay um
let me read the chats here see a lot of
really good discussion i really enjoy
this we have about 425 people watching
at the moment
uh a final point that i do want to make
about this strategy that addresses
another mis misconception that i had
when i was first introduced to options
i had the impression that once i did
this i was stuck
for the term of the contract so if i get
into this deal
if it's good through the 18th of
september i guess i'm on the hook until
the 18th of september
that's not actually true now if it's a
good liquid option you notice this is a
this is an option on a stock like
walmart these are heavily traded
pretty liquid okay but if it's a good
liquid option
and let's say let's just run through a
hypothetical scenario let's say even we
sold this 155 call
i wanted the income but let's just say
that investor
didn't really want to lose their stock
they didn't want to have to sell the
stock and then the stock starts to rise
and they're starting to sweat a little
bit let's say we've gone up to 150 to
153 dollars
and the investor is getting more more
and more concerned that this contract
might actually be
exercised and they might be forced
they might have to be assigned they
might have to sell the shares for 150 or
155.
well for whatever reason if
if an investor wants out of an option
contract
they do have the choice to go see if
they can get out of it and in most cases
they can there can be exceptions
where if we're dealing with an illiquid
contract
very thinly traded it might be harder to
get out
but let's say the stock is up here at
153
and the investor is sweating and they're
saying i don't want to sell the shares
this was stupid why did i get into this
let's say they want out but what they
could do is go
buy and say they sold the contract to
get in they could go buy
an offsetting contract to get out at
whatever the market price is for
contracts at that point
now the thing is if the stock has gone
up
it may be more expensive to buy that
call back than the four dollars and
thirty cents or the two dollars and
ninety cents or whatever that was
collected on day one
so there may be a loss that's realized
there on the option
but the trader might say to themselves
it's worth taking that loss on the
option to free up my stock ownership i
don't have to worry about having to sell
it
that really depends on on the market
price that option
at that future date at that future price
whatever it may be
but just be aware that
if we sell into an option it doesn't
necessarily mean that we're stuck in
that option
okay hey there you go michael exactly
right i do see some other chats coming
in
uh terry hill says what do you guys mean
by paper money so terry you'll notice
up in the upper left of my account it
says simulated trading with thinkorswim
the trading software that i'm using it
allows you access to
it allows an investor access to their
real td ameritrade accounts
but it also has a practice version it
looks it looks and works almost
exactly like the real thing so you can
play with strategies you can play with
tools and things and not have any risk
any real risk in the game
so that's it canciona says so as that is
called a
rollover right so that one actually
cancel on us would just be an exit
that just means we're just closing out
the trade so we would sell to get into
it
we would buy the option to get out of it
how is it done
let's go ahead and place the trade so
i'm going to go to the trade tab
if i already own the shares of walmart
all that i would have to do is come down
here to the option that i was interested
in
and click on the bid price for that
option so the 150
i'd click on right the 430 here for the
155 option i'd click on maybe on the
285.
i click on the bid because with
with options as with stocks we sell
at or near the bid price we buy at or
near the ask price
it's like if if i wanted to sell
something
at an auction i'd say hey how much will
somebody bid for me
for this contract that i'm selling and
they only sell to the highest bidder so
the
the we sell at the bid price
if we were buying we pay the ask price
or close to it because
whenever you're buying you might go up
to somebody and say how much you asking
for that i just bought a car just a
couple of days ago
first question how much you asking for
that i will end up paying
close to the asking price not exactly
the asking price but that's
that's a good way to remember that
terminology
sellers you sell close to the bid price
buyers you pay close to the ask price
so how do we place a trade click on it
so let's just say i went with the
original
strike price let's click on that 430 and
that brings up an option order right
here it's kind of squished you can't see
the whole thing this should say the word
sell but it says se dot dot because
there's not space
so let me close this left column and
that just gives me some more space
so we're going to sell 10 contracts with
each contract would be
representing 100 shares that would be a
1 000 share commitment
let's dial that back whoops let's dial
it down to
a minus one okay that means i'm selling
one contract
for the 18th of september the 150 call
on walmart current price around four
dollars and 30 cents
and i could submit that as a limit order
or i could change it to what we call a
market order
now in this account i don't actually own
any shares of walmart so if i wanted to
buy the stock right now
and then immediately sell a covered call
on it i could do both things at the same
time
here's how to do that let me just delete
that order
i'd come back up here to my option
i'm going to right click on it and put
in a
buy order for a covered
now i'm going to change the terminology
here a little bit covered stock
thinkorswim calls it a covered stock
it's a covered call it's the same thing
okay john says how does the covered call
strategy work with dividend stocks
around the record date john
good question if if the stock place pays
dividends the options are going to be
adjusted for the stock
stock prices right the stock price
changes on the on the ex dividend date
um the
owner what we should know is the guy or
the
trader that bought our call from us
it can slightly elevate the risk that
they decide to
buy the shares so they can get the
dividend so be aware that that's a
that's a possibility
okay so i'm going to choose covered
stock look what that just did
it brings up a default order to buy a
thousand shares and sell 10 contracts
let's adjust this so it's just 100
shares
and one contract so we're now buying the
stock
and selling a call at the same time this
would be an approximate
net cost for that trade spending 147.59
cents or they're about
bringing in four dollars and 30 cents or
thereabout that brings us up
to a final total cost of around 142.98
okay i think i'm going to do this
let's push this up let's say i'm willing
to spend just a little bit more
try to get a slightly better chance of
getting a fill on my order tomorrow
anytime though we enter a limit order
there's a risk that the order might not
fill that's just a reality
but i'm going to click confirm and send
and we're going to buy
100 shares of stock and sell a call
to get that initial income all right
there's our break-even price on the
stock here's the maximum
profit on the trade if the stock goes up
we get called out we make some money on
the stock we make some money from the
income
there's our profit if the stock starts
to fall well we do have the risk of
ownership of stock so
when we see this maximum loss that's
assuming the stock
walmart goes all the way to zero could
it
theoretically yes am i expecting that
it's hard to say that that's very likely
it's still within the realm of
possibility
in any case there are transaction fees
associated with this sort of a strategy
and i'm going to just send this order
off okay
so tomorrow we'll see if this order
filled but we're just doing an
income strategy with the stock and it
seems to be maybe at a short
term uh point of hesitation
that's the logic of the trade boy
everybody i really appreciate your
attendance today i think this is
fantastic
again for those of you who are new we do
this every week
it's not always covered calls though so
next week we'll choose a different
strategy
oh bob you're getting sophisticated on
me could i have done a long-term option
and then sold a similar call
we could have yep carries its own reward
and risk scenario though
so we'd have to spend it we'd have to
spend some time reviewing that
okay james thank you for your help
uh i'm gonna set everybody loose though
but with an invitation to join we have a
virtual workshop coming up if you want
to check today's calendar you can see
that you can quickly register for that
of course it's free like call for the
rest of our events
but you can go watch that you learn
something new d
so you're happy very good just remember
this was not
a sales pitch for this strategy just a
discussion
do with it what you will if it's your
first time though
d or anyone else go to your paper money
that's this practice think or swim
account
and maybe place your first covered call
trade on a stock that you might
you think looks like it might be you
know what a hesitation point at an
inflection point might be going down
everybody thanks for joining me today i
will see you next week
same time same channel but between now
and then
remember the risks associated with
investing we talked about the risks
associated with covered calls risks are
real
other regularly scheduled sessions i
have a new one every single day of the
week
tomorrow six o'clock eastern standard
time that's in the afternoon evening
i have a webcast called today's markets
and what you can do about it so if you
want to check that out i'd love to have
you there
well so i'll look for you tomorrow or
another day
but certainly next week but hey whenever
i see you again
until that moment arrives i want to wish
you the very best of luck happy
investing
bye
