Covered Call Tutorial
TLDR - Skip Down
Now I don’t know if you’re all seeing what I’m seeing, mostly because I can’t see much on this laptop to begin with, but also I’m pretty sure the image isn’t super clear.
NAK (Northern Dynasty), is trading at the strike. “But Rocky!”, you say, “I didn’t get to spend the last 5 months living rent-free at my mom’s house, unemployed, and learning to trade!”
Hurtful, yet fair. So here’s our example of why this is awesome - 0.50/share x100 = 1 contract @ $50. You SELL CALL on your 100 shares of NAK. for 0.13/share, or $13.
You paid $50. You got $13 in return. That $13 is yours, no one can take it away from you, not even the IRS. (If that statement causes you to commit tax fraud, send pics to stouttheirish@gmail.com)
So now you have only spent $37 for 100 shares of NAK. At the end of the week, one of two things happens. Your option will expire worthless (meaning you keep the stock, and write another call next Monday for $13). On the other hand, if the stock price moved up, your shares are taken away from you by men in ski masks with sawed-off shotguns. Scary stuff.
Your shares DO get taken away, or rather, bought from you. And since the Strike Price was .50, you receive $50. Yes, you put $50 into the magic box. At the end of the week, you get it back. Plus $13. You got paid $13 just for having $50 in your account. You got 20% return in 1 week on $50.
I tried explaining this to people in real life and offering to help show them…it doesn’t go well. People have a million excuses before they get pissed, while refusing to admit they like being poor. So what exactly is going on? Why doesn’t everyone do this? Well to answer the second question…they do. Pretty much everyone that wants to get paid for doing pretty much absolutely nothing, with minimal effort and virtually no risk, is doing this.
Virtually? Yes, there is a slight risk. Let’s say the price of NAK dropped to 0. Which, for brevity’s sake, is not going to happen. It COULD happen, just as much as I COULD get labelled a domestic terrorist because of voting choice. … wait, what? Who’s Joe Biden and why’s he so pissed?
Alright so let’s review. Without pictures. I suggest a pen and paper.
Share Price - The price of a share of stock. Just a pricetag, simple and elegant in its majesty.
Strike Price - The price at which an options contract can be executed.
Premium - This was that $13 we got.
Think of it like insurance. Ralph wants to buy 100 shares of NAK at .50/cents, because he thinks the price will go up, but only if that happens. Otherwise he is not interested. Therefore, he pays you $13 for the right (not the obligation) to buy YOUR shares for .50/cents, no matter what the price has moved to. Okay so for our purposes you don’t need to know or care about Ralph, but the whole thing seems sketch when it looks like magic money materializing.
Option - The right (Not the obligation) to buy or sell 100 shares (1 contract) of stock at an agreed-upon price.
Contract - 100 shares of stock, agreed to be bought or sold at an agreed upon price at some point in the future.
Time Value - The closer an options contract gets to expiration, the less it is worth.
Put - You sell a put to agree to buy shares of a stock. It’s the opposite of a call, but in reverse.
Call - A contract giving the buyer the right to buy shares of a stock, at an agreed upon price in the future. We call that agreed upon price the Strike Price.
ITM - In the Money (The stock price has crossed your Strike price threshold).
OTM - Out of the Money (The stock price has yet to cross the Strike price).
So basically when you buy a contract, Put or Call, you are betting on the stock price moving in a particular direction. You pay a premium based on the strike price (the price you want to buy/sell at), such that if the stock moves the way you want, you make $$$. If it doesn’t, you only lost a small amount of money. “So why not just trade contracts?”, you wonder. They do. All the time. It’s a pretty big deal.
Risk - Infinitesimally small. Even in our example of writing a call at .50c strike, if the price goes down it’d be unlikely to move more than 5 cents in a day. You have no way of knowing this, but I do. Watching NAK not move is my life, second only to watching paint dry. The price would have to drop 14 cents before you technically lost any money. And you’d still be holding those shares.
If you wanted to be super conservative, you could sell a call on NAK at $1 strike for like .03 (you get $3, and keep the shares unless NAK hits $1 share price). Oh and that business about Right not Obligation, yeah that is true, and most options never get executed early, BUT they do closed out automatically on expiration day if they haven’t been closed by the end of trading.
Selling puts works similarly, but you put up the full price of the 100 shares at strike, and get paid a premium. If the price goes up, you get your money back. If the price goes down, you buy the shares at your agreed upon strike price.
Agreeing works automatically. You don’t need to talk to a human (GROSS!).
So that’s pretty much it. As long as you’re selling Calls (or Puts if you consider owning shares a winning scenario,), you really can’t lose. In both cases you can sell far enough OTM that you can bank on just getting your collateral back. And if you accidentally sell super far ITM, well, then at least the premium mostly makes up the difference and it’s basically like if you had just sold your shares.
I originally wrote this with weekly options in mind. NAK only trades monthly. My bad. However, 20% return in a month is still really nice. So just apply the same concepts to something that trades weekly, like CODX.
TLDR
Buy 100 shares of NAK at $0.50/share
Trade NAK Options
Sell Call, $0.50 Strike (week ending 2/19/2021).
That’s fucking it.
Oh crap, Monday! I nearly forgot. A lot happens Monday morning (also if you’re on Robinhood, it becomes super laggy), because of all the orders set up over the weekend waiting to be executed. A line graph doesn’t really show you, but shit tons of trades happen in quick succession and price anomalies happen. (Anomaly used incorrectly btw, it’s all super fast math). I sold a $1 strike on NAK at $1/share price, for $0.95. When something like that happens, you get hooked, and excited, then disappointed, before experiencing all sorts of irrational emotions. Not unlike a woman.
