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SMB CAPITAL OPTIONS TRAINING PROGRAM

SMB CAPITAL OPTIONS TRAINING PROGRAM . SESSION THIRTEEN . COVERED CALLS . COVERED CALLS. COVERED CALLS ARE USED TO ENHANCE INCOME ON PORTFOLIOS OF EQUITIES THAT THE TRADERS CONSIDER A BUY.

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SMB CAPITAL OPTIONS TRAINING PROGRAM

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  1. SMB CAPITAL OPTIONS TRAINING PROGRAM

  2. SESSION THIRTEEN COVERED CALLS

  3. COVERED CALLS • COVERED CALLS ARE USED TO ENHANCE INCOME ON PORTFOLIOS OF EQUITIES THAT THE TRADERS CONSIDER A BUY. • PROGRAMS OF COVERED CALLS ARE NORMALLY UNDERTAKEN ON LARGE CAP, MATURE STOCKS THAT , HAVE PLENTY OF OPTIONS LIQUIDITY. • PROGRAMS CAN ALSO BE UNDERTAKEN WITH ETFs IF TRADERS ARE BULLISH ON THE STOCKS WITHIN THE SPHERE OF THAT ETF. • COVERED CALLS CAN ALSO BE DONE “SYNTHETICALLY” FOR SMALLER CAPITAL LEVELS USING DEEP IN THE MONEY CALLS MANY MONTHS OUT IN WHICH CASES INDICES CAN ALSO BE TRADED (YOU CAN’T BUY 100 SHARE OF AN INDEX, BUT YOU CAN BUY A DEEP IN-THE-MONEY CALL OF AN INDEX).

  4. TRADE STRUCTURE— COVERED CALLS • AN EQUITY IS BOUGHT (AT LEAST 100 SHARES) FOR WHICH TRADER HAS A BULLISH BIAS. • CALLS ARE THEN SOLD, “AGAINST” THAT LONG STOCK, 30-37 DAYS OUT EACH MONTH TO TAKE ADVANTAGE OF STRONG DECAY OF NEAR-THE -MONEY OPTIONS DURING THAT PERIOD. • SELL THE CALL SLIGHTLY ABOVE THE MONEY. THE CRITERIA SHOULD BE THE CALL WHICH CONTAINS THE SECOND HIGHEST TIME PREMIUM IN THAT MONTH’S OPTIONS CHAIN IN THIS TECHNIQUE.

  5. If stock rallies and hits the short call strike. • The long will appreciate, the short will probably go negative. • In any event, roll the short strike up to the next strike unless….. • This occurs within 15 days of expiration in which case roll to the next month’s second highest time premium call and repeate the cycle.

  6. If market sells off, • Buy back the original short call for a profit of 80% of its original value and sell a lower call, at the next highest strike above the highest time premium call strike. • Repeat the process multiple times within the expiration cycle if necessary, until 15 days before expiration in which case the call should be rolled to the second highest time premium strike in the next month.

  7. COVERED CALL TRADE— FSLR 2009-2010

  8. Initiate covered call position.

  9. Rolling call to next month

  10. Roll down in same month

  11. Short calls subsidizing loss in underlying stock.

  12. Roll to March

  13. More Covered Call Premium

  14. Stock position down, total position up

  15. Risk graph 8 months into trade inclusive of all realized gains (scalped call premiums)

  16. Trade finally closed

  17. Homework • Utilizing Optionvue’sbacktrader module, select any large cap stock in any January over the last five years that could have reasonably been considered at the time to be a “buy” (even if it later proved to be a loser). Undertake a covered call program for that stock as laid out in this session. Set up an account in Optionvue for that trade and compare the final twelve month results to simply owning the shares outright. • Do the same for two other stocks, starting in two different years.

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