hello and welcome to cover calls and
short puts my name is james boyd
we welcome you here today today is
august 31st
last day of august here markets depends
on which market you're talking about
nasdaq being strong s p flat dow
actually down about 200 or so uh
interesting day on the last day of of
august
and also volatility up we'll talk about
that in just a moment we also have in
our stead
we have uh pat malali some of you know
him as
mr vicks if you want to call him that
and uh we appreciate him being here
so just know i am presenting pat's going
to be in the chat
we're going to do a little double team
today and so look forward
look forward in uh helping you discover
these topics of cover calls
and short puts great to be here with you
grace bill
tony kenny lewis jenny uh sandy ray len
and many others welcome i also welcome
your questions
so as we go just make sure if you have
any questions no pat is in the chat
okay initials p.m and i'll be looking
for the chats as well to see if there's
any questions
as we go please don't feel like you need
to wait till the very end ask questions
just go ahead and ask along the way okay
now remember as we get started you can
follow us on twitter pat malone go to
twitter.com go to type in pat malala
or just type in james boyd you'll see
our faces there and some educational
content
as well just real quick as we're getting
started remember as we talk about
options
remember that options are not suitable
for all investors special risk inherited
trading options
make sure that you've read the
previously provided copy of the
characteristics and risk
of standardized options also remember
when someone does say
cover call it can limit the upside
potential
also remember when we talk about we're
going to demonstrate the function of the
platform
and when we do that we're going to use
actual symbols that does not mean their
recommendations
they're examples of the strategy using
the platform
remember that any investment decision
you make in your sector self-directed
account or solely your responsibility
and as we talk about options remember
the option greeks delta
gamma vega and theta okay now
what we're going to talk about here we
like to follow the same format so we
know what to expect
we will take a look at the market up
update real quick
number two we're going to talk about the
volatility index just maybe something we
want to continue to keep our eye on
like higher and higher and we're also
going to talk about
last week the trade we did last week
take a quick look at that
and talk about some trade management
examples
and we're going to talk about the option
greeks there and when an investor might
roll the option or exit the option
third we're going to talk about new
examples one example is going to be
something that's
going into earnings another example is
just more of an example of a bullish
trade
and then we're going to also talk about
two cover call trades
so we got some work to do here today
remember all trades
in this paper money account they're done
in web webcasts okay
so you can kind of tell sometimes
sometimes we're more active or not
active and you're going to see that
today we're going to be a little bit
more active and we'll talk about
why so let's go ahead and tee it off
here uh
so first off one thing i want to show
you just real quick is you can go to
my twitter page yesterday which
sunday i posted this so this is a great
way to have a routine
coming into the week of really making
sure
are you seeing or are you evaluating the
trends
uh in the market i posted that yesterday
kind of show like this and what you're
going to notice is i mark on the chart
where potential support and resistance
levels are on the market
so if you're asking well where are the
potential support and level support and
resistance levels
whether we look at the dow s p nasdaq or
the russell
i marked that chart up and i shared that
chart
you might look at the markings that i
have and then kind of might compare them
to what you would be seeing
and see if they're similar number two
well
and with that said let's kind of go with
the indexes let's talk about those right
now
so if we bring up let's say let's start
with the s p
if you take a look at the s p it was a
brand new high here today it wasn't
necessarily
a smashing high okay but you're going to
see that it did go to a brand new high
here today
still see that shade of green okay
and again when you see the shade of
green and price above both moving
averages
just tells us buyers are in control and
boy have they ever been
now if you take a look at this you know
kind of seeing maybe where the market
if you talk about a bowl flag poll right
one day two three four five
six seven the market has been up well
probably about six out of eight days in
a row
at least the last let's see about the
last six days in a row
and if the market can close higher than
where it was on friday
be the seventh day in a row of just
higher closing prices
i know that hurts some people okay uh
but some of you are happy about that
and so very strong on the s p might
kind of when you get to that type of
move where it goes up like that
a common idea is maybe to get it to
pause a little bit
a pause does not mean bearish a pause
does not mean the trend doesn't know
what it wants to do
it's just exhaling some of the recent
price action
nasdaq you're going to see that that was
one
very strong price action here today you
had apple
did the 441 split which is up five
dollars and thirty cents
tesla split today five for one
tesla's up about 49 post split and
you're going to say
amazon doesn't hurt up about 79 okay
now if you take a look at that so that's
a 1.2 percent move
up on the nasdaq so nasdaq still being
very strong
down not really down aggressively down
about 200 points
which is about seven tenths of a percent
the chart of the day though that we need
to kind of keep an eye on
if we're just being honest right is
really the vix
okay this class covers two main
strategies number one covered calls
which is a bullish strategy implies the
investor has a stock
and they sell a call okay sell a call
okay number two selling puts
okay so i said before selling calls
selling puts both of them
are strategies where the investor is
trying to create income okay
receiving a credit but when the investor
sells
something that means it's short
vega now what does that mean really mean
okay it means if the volatility in the
market
starts to go up that will probably make
individual stocks implied volatility
most likely go up not necessarily all
but probably more than less
if the volatility actually goes up and
someone did cover
calls might get hurt a little bit
from time from that implied volatility
rising
number two if someone sells puts
and the vix is breaking out of
resistance
okay and this is kind of sometimes where
investors they get
they feel like they get really good with
something which is i'm not saying that's
not true
but what happens is they don't
understand when the conditions change
and if someone is selling puts when the
vix is breaking out
they need to have a mindset that they
probably really want to own the shares
and if that volatility actually were to
break out there might be let's say
price deterioration and the volatility
going up which
might numb some of that time decay
so we've seen for about the last week
even though the market's actually gone
up
volatility is creeping a little higher
okay
that is actually saying when you look at
a lot of different stock positions
there might now start being they might
start to be
more stocks that are starting to maybe
flatten out
okay maybe neutralize and maybe starting
to get down below their support levels
investors traders keep an eye on that
okay when that volatility breaks out
this is not the time to take a nap or
i'll check back in three or four days to
see what's happening
when that volatility actually breaks out
it's all hands
on deck because if you get a big spike
where you go to 30 35 those
unrealized profits they quickly
deteriorate okay now that is not
james being super bearish negative just
saying this kind of warning
signal right now let's kind of now talk
about the last trade we did
from last week okay so first off when we
take a look at last week we did a trade
and we talked about weekly options okay
the option that was sold last week it
was the 28th of august
expiration the ticker was ba
and ba the option that was sold was the
170
250 for two dollars and 12 cents
that stock closed at 175.80
okay so remember i had the obligation to
buy the stock
if it closed at we're talking about
expiration
at 172.50 it didn't close below that
so the paper money account just took the
premium
of 212 and missed the opportunity
to buy the stock now number two trade
from
last week was dow uh three contracts
sold
when i say dow i'm not talking about the
index of the dow i'm talking about dow
chemical
sold three contracts last week just
following through just like we promised
so three contracts the 45 put
and those were sold for a dollar 48
three contracts
the expiration is the 18th of september
those are still kind of well holding
right around the 45 dollar price level
when we take a look at let's say that
position from last week it has not gone
to the expiration
like uh we saw boeing it's right there
with 18 days left it's still cooking
in the oven okay so i want to follow
through on that i don't want to just
you come to my webcast and every week
you don't know if we're going to follow
through
i'm going to follow through can't stand
it when people don't follow through okay
so those boeing expired full max game
trade number two boat dow still cooking
doesn't have enough here yet to profit
take
it only has five percent of the premium
so far
sold it for 148 it's at 139 it's barely
moved
okay now okay now a couple you are
coming into my haircut
yeah what i did is uh well i couldn't
find any haircut places to go to so i
took a popcorn bowl and
decided you know i could do it myself
i just won't turn around i'm joking no
i'm just joking i just want to make sure
you're listening
yeah or or my ears got lowered right
yeah there you go all right so yeah
everyone's asking me when am i going to
get a haircut i'm like what's wrong with
my ponytail
okay my whole family was like okay you
were in long hair
that's not where you really want to go i
didn't know what i thought what that was
all about
all right so now let's go to really
agend item number two
let's kind of talk about some of these
short puts okay
so first one i want us to pay attention
to here
is this one now i want you to kind of
take a look at the short puts we all put
we put them in a folder
so that way we understand what type of
strategy they are okay
now here's the short puts that were done
in the class right
and you're gonna see that there's one of
them ticker zm
you're gonna see that there's also a
blue circle
okay earnings and that red there is
a conference call now none of the other
ones have that
so if the investor said geez time is
limited
which one should i actually look at well
it might want to go to the one where
there's an
earnings upcoming right now by the way
that earnings if we go back and take a
look at that that earnings is
uh it's going to when we click on that
it's going to be earnings on 831
after the market just want to make sure
we haven't passed that time
so we have 48 minutes to talk about this
and so i want to
touch on this one first okay so first
off
zoom has okay remember it's the
obligation to buy the stock at
250. there's 18 days left
okay the option was sold for 1680
and now that mark has actually now gone
to 335
okay now the one thing we want to kind
of take a look at is always a quick
reminder
about looking at the greeks when we take
a look at the delta there
it's 992. now if though
if the delta goes to single digits
about what percent of the option if you
had to speculate
has the investor made or unrealized
profit what percent
so if this option was sold with a delta
30 to 40
which is out of the money and now the
delta later
is let's say single digits well if that
if that is let's say
10 okay if that number let's say
the number is less than 10.
that probably tells us there's probably
80 plus
percent of maximum gain
if the delta is less than less than 10.
so what we're going to notice is if that
delta is less than 10
we go over and look at right here and
the profit loss is about
80 percent now james could it be 70
percent
is this kind of a little lucky well
you're just going to see on average it's
probably going to be about 80
or greater it just so happens to be at
80 and remember this
number of let's say this delta of 9.93
that's saying the statistical
probability of the stock going from
318 and closing
down below 250. now remember that's
70 dollars down now what we know is if
there's
any time left whatsoever is there still
a probability
yes even though it doesn't seem like it
there's still time how many of you have
had your sports team
lose on the last play of the game i have
okay even though you said there's no way
they could throw it 70 yards they did
touchdown okay it's happened so if
there's been
if there's some time left there's still
some
there's still time for that stock to go
down and give all this back
and lose more and potentially own the
stock
so in this case what would you consider
would you a
say i'm going to take that potential the
80 percent
number two would you consider enrolling
that option
that's kind of you got to be careful
there because if you roll
you're just setting up a new position
okay so
b would be roll and c would be
i want you to vote c would actually do
nothing
just let it stay see what happens
okay low probabilities but the risk is
giving back even could could start to
give some of that back
okay now a lot of you are actually
saying book it
book it daniel okay okay
so if the investor is actually saying
book it they're just simply right
clicking on that line create a closing
order
buy it back so remember even though
there's 18 days left
the investor can get out in this case as
being able to get out
and try to lock that gain down okay
that gained about 13 13 45
buy it back and now what you're going to
see is single by plus one
250 put and the mid price is
at 340. so we're going to keep it right
there
340 340 and that way if the stock were
to gap up 20
down 20 etc and by the way when you look
at the market maker move
you're thinking there's no way it can
move that much that market maker move is
forecasted to go up 30 or down 30.
okay so it's pretty volatile right so if
the investor says i don't really want to
go for a roller coaster ride not today
i want to book those gains the investor
could say hey i'm going to close it out
confirm and send
remember the investor is giving some of
the initial premium receipt back 340
plus a commission of 65 cents if that
investor was okay with that they could
say
send the order and they shut it down
so now what you're going to see is in
that position is uh
that position comes off we do not see in
the short put section
zoom is in there you're going to see
that one of the filled orders was
zoom it just filled you can also click
on
messages to see that or you can click on
filled orders to actually see that as
well
those are two places to see did the
order
fill and if we click on that to show
that
there it is okay now number two i want
to actually really kind of talk about
just real quick
is paypal now paypal has
two examples i'm only going to talk
about one of them
and what you're going to notice is in
this case now
when i say paypal it we're talking about
venmo okay
as well they have a couple different
apps
where people can electronically send
money okay
we're just going to touch on one now
these are some positions that are kind
of getting right
or right around the 50
threshold okay now what you're going to
notice right in the delta column is
these deltas are not in the single
digits
like we saw in zoom so if we're sitting
in a situation where that delta let's
say
is in the teens which this one is
that's probably a better chance of
probably having something close to 50
percent
if that delta was in between 30 to 40
probably doesn't have any gain
yet okay and what you're now going to
see is these are for the most part
kind of let's say below 30 or 20 and
they're sitting
right at about 50 percent now let's kind
of
talk about this one right here the 195
put
now if someone were to ask you at what
percentage
do you consider profit taking and
or rolling what would you tell them at
what percentage
do you consider profit taking or rolling
now go ahead and type that in i like to
hear the answer
okay so by the way when i as i get that
answer i'm going to go back let me show
you what the chart looks like
this is what the chart looks like it's
been in a pretty strong upward trend
recently got down below that shorter
term moving average
so maybe a little weakness but at what
point what percentage
okay well now if we take a look at this
what you're going to notice is if the
investor said you know what james
the first 50 is the easiest
65 harder 80 percent harder
okay and anything past that you're going
to typically have to have a very strong
move to the upside
because the selling of put is bullish
and or
hold that trade closer to expiration
now couple you louis peter
terry bill bill i knew you would say 50.
i'm just joking
harold a couple you are saying if it
gets to 50
that's where you're going to look to
exit and or roll so let's
show this example if you said you know
what james that one right there
is at 50 right there what's the example
of rolling now by the way
the option was sold for 615
and the mark right now is at 305. okay
remember we could talk about this at
length the first 50 percent is probably
the easiest okay
after that the premium that's
left is substantially less than what it
was to begin with okay
we're going to talk about that in greeks
in just a moment so if that investor
said look i want to
roll that option okay right click on
that line create a rolling order and
then we're going to just going to click
on where it says
cell minus one calendar
so we right clicked on it create a
rolling order and then now just going to
click on that right there
now once we do that the bottom line
this is saying that it's buying the
option that is in
the portfolio now the upper line is
saying
which short put would you consider in
selling
now by the way could you actually pick
the exact same expiration
you could could you just maybe instead
of saying 195
could you say i'm going to take the 200
strike yes
but typically investors will set these
back up the way they had them to begin
with
which is they might pick something let's
say
20 to 50 days to expiration the next
expiration month that's a little bit
farther out in that
area of 20 to 50 days it's really going
to be
in the october expiration yes
yes october i said and if that investor
were to pick something 20 to 50 days
the expiration that has a delta of 30 to
40
would really be the 195 strike
now remember when the investor sells the
put
it's with full understanding that
they're actually saying look
i'd like to be the buyer of the stock
from now into expiration
at 195. so this is rolling out forward
in time
and just picking the exact same strike
that really matches what was
previously done where the delta is let's
say
30 to 40. now by the way if the investor
said james
you know i want to be a little bit more
conservative want to change that maybe
to the 190 strike
could they maybe change that to the 190
and have a higher probability that the
stock would not be below that yeah
they could just simply change it like
that okay so that's just a simple change
there
in this case we're going to keep it
right at 195. let's show an example of
rolling okay we're going to confirm and
send
now there we go remember it's buying one
option back selling the other one
dollar 30 there okay commission
if that's okay send the order
there it is we'll see if it actually
fills now one other thing i want to kind
of bring up just real quick is
let's kind of talk about a stock that is
going into uh
its earnings and the example that i'm
gonna bring up
is docucu
okay now what you're gonna see here is
we're gonna bring up
okay now so zoom filled
paypal was the example of rolling two
trades done so far
docu now what you're going to notice is
those earnings
let's go back and take a look at this
these earnings are right there on
september 3rd first
second third it's gonna be thursday
okay now going into earnings what would
you expect the implied volatility to be
going into earnings what would you
expect the implied
volatility to be let's take a look at
this
so what i want you to kind of notice
here is kind of sometimes a pattern that
can happen
sometimes when we go into these earnings
you can see previous spikes
let me kind of guide your eyes to see
this spot right
and what you're going to notice is the
here's the deal
so the implied volatility if you go back
and look over the last couple months
it's at the height nearly the highest
point it's actually been
in about the last five months high
implied volatility does not mean it's
better
high implied volatility means they're
actually
pricing those options for greater price
moves
up or down on the stock
so if we go take a look at this let's go
take a look at the trade tab
and say well what is the market maker
move
well the market maker move there is plus
or
minus 20. okay so that means the stock
could go up 20
or down 20. that is their forecast
okay so the biggest actually thing you
hear to also understand is
would an investor go let's say an option
that is closer expiration
or would that investor consider maybe
going something
further out in time now
i think it's important also take a look
at number one when are the earnings
september third
and if we go look at the options that
expire the day after
the implied volatility there is 119
ish if you go down the option table and
look on the right hand side of the
annualized implied volatility you're
going to see that over time
the implied volatility drops so a lot of
that
polish sausage if you want to call it
that
is really packed in to really this
friday's expiration when there's a
greater forecasted move
and you're going to see it's 20 up 20
down let's practice this okay so let's
say the investor
says james i want to learn about the
implied volatility we did this with zoom
last week
no i think it was actually crm crm last
week on tuesday
we're going to go to the september
expiration and we're going to look at
all strikes and the reason why we're
going to look at this is kind of talk
about the strategy
right so first off let me kind of guide
your eyes
so the stock price is at 221 and here we
are looking at the
at the money strike price on the put
side okay now first off when we talk
about at the money
we know when we say at the money the
delta must be 45
50ish somewhere right in there and it is
then if we actually go if the delta goes
lower
strike is lower and that's just saying
hey if the investor we're going to sell
a strike with a lower delta
that's actually saying there's less
probability of the stock
closing below that strike price
if there is a lower probability
the premium as you'll see is lower now
in this case
if the investor is trying to account for
some
of the implied volatility let's say the
investor said you know james
the investor says i'm going to try to go
down and not sell something with a delta
of 30 to 40
but maybe sell something with a delta in
the 20s
the idea there with a delta below 30
even
is higher probability the offset is
lower premium
okay now in this case if we take a look
at this
let's say the investor chooses the 460.
and now what you're going to see is you
got a 460 bid 485 ask
and if the investor clicks right on that
bid
might be able to maybe get 470
which is in between the bid and ask
remember this option is very short dated
okay it's friday
and now let's kind of run the example
here so let's kind of go to one of the
column headings and i'll highlight that
so we're just going to go to one of the
column headings and we want to actually
make sure
one of those says theo price what we're
trying to think about is what happens if
it goes
up sideways or maybe even down
well if the investor were to click on
that and go down to
option theoreticals and greeks the
column heading we're looking for
is that one right here it's right there
now what we're trying to do is we're
trying to figure out well wonder
we know if the stock went up it'd be
good the stock went sideways it'd be
good
but wonder if it were to go down how bad
would it be
so let's kind of take a look at this now
sometimes people don't like to look at
this but
it's kind of nice to know what the
damage potentially could be
before so right above where it says puts
now you're going to see that it's going
to say theo price
and let's kind of run this example where
we bring it up and say look let's fast
forward to let's say
friday okay september 4th
now we know if that stock were to stay
zero okay nothing happened
this would be wonderful because remember
if that stock actually stays
right at that price of 221 dollars
it's not below that strike
that means that that 470 dollars a
premium ish
expires worthless now we know if the
stock were to go up that'd be good but
the thing that this is not accounting
for is
it's not accounting for implied
volatility so if the implied volatility
would also
drop that would also help if the stock
went up
or if the stock went sideways but let's
kind of imagine that the stock went
down ten dollars okay
well the stock went down ten dollars
okay not trying to lose anyone here
it goes from 221 goes down 10
and that means the resulting price is
211.
well that's not below the strike but
it's closer isn't it
now if that were to happen if the stock
were to be down ten dollars
the option at that time would go from
about four to four
sixty down to two dollars and thirty ish
cents
so it'd still be profitable but one
thing that this does not factor in is
what about implied volatility
if that stock for example were to have
let's say about a 10
drop on volatility and a 10
move down on the stock you're going to
see that that would be good
remember the investor when they sell
puts they're trying to sell high and buy
back low
okay so that so the stock could go down
ten dollars
how far could the stock go down before
it starts to eat into
some of that option well if the stock
went down 15
the volatility was down about 10 percent
what you're going to notice is
theoretically that option would if it
was sold for 460
it'd still be at 360. it'd be up about a
dollar
even though the stock went down 15 and
then just kind of add insult to injury
let's say it goes down
20 dollars by friday 20 bucks
it goes from 221 down to 201
and the we're just saying the implied
volatility only drops 10 percent
well if it only drops 10 percent what
you're going to notice is
this would be the bad situation if the
investor sold for 460 and now it's at
2 26 that means that there would be a
potential
loss there of about a dollar sixty
now if the stock were to close below
that strike
the investor could also be assigned to
buy the shares of the stock if they do
not
close that position out prior till
expiration
so this stock closable of the 205 the
investor is going to be the buyer
100 shares at 205. so we kind of ran the
bad
situation which i think was fair but the
one thing that we would actually kind of
bring in here is
how bad was the previous implied
volatility drop
well it was about 75
and you're going to see it really kind
of fell down to about 55.
and if you kind of look and see where we
are now 75
i only said that if it went down let's
say 10 percent
could the investor go in and say what
happens if the implied volatility
implied volatility drops down twenty
percent
let's take that last step let's say it
drops down twenty percent
like last time in our example what would
happen to the option
well that option if it was sold for
about 465
592 it'd be down about a dollar
30 or so okay so why do investors do
this
well because they're the premium is
packed
okay and if that option if the stock
were to drop
the implied volatility collapsing
can help offset some
of the stock drop okay that's the idea
so in this case the paper money account
is going to sell the option
okay only has four days to expiration
the weekly options
selling the 205 force 80
if pay money can get that 480 is the mid
price
and then confirm and send that order now
remember what is the obligation
the obligation is to buy 100 shares of
stock
at 205. it's about 20 000 worth of stock
there's the credit there's the there's
the commission this money is set aside
just in case the paper money account had
to buy
the shares now by the way i'm going to
say this
if someone is going to consider is if
the investor is going to consider
doing an option short or dated not doing
the due diligence of
theo price is really not being serious
notice how we took the time and kind of
said hey
how bad could it drop so if if there
were a situation where
we see that the investor sees docusign
down 13 after hours
the investor is saying well based upon
the calculations that were done on that
paper money theory
theo price it could be down about 20
because if as long as the volatility
drops about 20
those options are probably going to be
pretty close to where it was sold
this will be interesting to watch uh
from
this week today till next time so if we
take a look at that if that's what the
investor wants to do
going to sell that option going to put
it right in that short put
section right there
okay now if the investor says that's
what they want to do
going to send the order okay now there
any questions to what we just talked
about was that helpful to kind of walk
through the scenario
seeing what the price if it goes up
sideways or down
and also how that volatility also
affects okay what the option price does
i think that's something that needs to
be
discussed that's why i wanted to bring
it up let me know if you have any
questions on that
now the other thing i want to kind of
really bring up and this has been
something that
i've just i've lost sleep over the
weekend just thinking about this okay
so first off i have this i i've worried
over the weekend that maybe
some people don't understand what's
causing an investor to roll
well remember one of the things we said
before what would cause someone to roll
is a certain percentage of that option
premium
that has been depleted okay but i want
to speak from an option greek
perspective let's take two to three
minutes
and just look in an example so let's say
and we're just going to kind of now we
could write this out on the board
for time let's just kind of look at this
example short put strike let's say is
50 okay just an example
okay let's say for example the premium
in this case was
200 all right delta when the investor
sells the put the delta was 35.
remember that's the that's the dollar
change
okay in the option and what is gamma
think of gamma as the change in the
delta
so if the stock goes up a dollar how
much
is that delta changing by that
change in the delta is gamma
now let's take a look at this and this
is your pop quiz for the day
okay stay on your toes here we come so
let's say the stock actually goes up a
dollar
it goes up a dollar the first dollar
is if the stock goes up a dollar the
option is really going to make
approximately theoretically 35
and then if the stock actually goes up
let's say two dollars
notice that the delta does not stay the
same
it's getting lower why is it getting
lower
well because there's less chance of the
stock closing
in the money the stock goes up another
dollar
it's up three dollars now notice that
the delta
now is drops even to 25.
so having a delta drop on selling puts
is that good or bad
oh that's good the investor wants
the delta to drop because that's stating
and showing
that the investor that that trade has
less likelihood
of that option being in the money at
expiration
now if there was an option premium of
two hundred dollars
and if we kind of just take a look at
this 35 30 25
that means that there would be about a
potential
ninety dollars a premium so if that
stock just went up one
two three dollars that means
based on delta that option really has
made about
ninety dollars ninety dollars
out of about how much 200
so that means just on a three dollar
price move
a just a three dollar price move about
40 ish or 45 or so is gone
or unrealized profit just
on a three dollar price move okay
now let's finish this i wonder if the
stock were to go up four dollars
well and gamma it's the change in the
delta
gamma and what you're going to notice is
it drops down to 20
15 10. and now what you're going to see
is once you get out to about
10 or less or single digits really on
that delta that's why the investor is
choosing to roll
those options are so far out of the
money they might become a liquid
okay the other part is they've already
made a certain percentage
of that maximum gain if someone's
trading short puts and they don't know
that if those
if that delta actually declines that's
saying the stock is going
up number one number two it is also
saying that
time is going by and that is good
so the delta does not stay stationary
it's dynamic
and the change in the delta is gamma
okay so very important you understand
that and that's why
investors are rolling because they're
seeing number one the delta is getting
smaller
closer probably to 10 or less and by the
way that also means
that probably those options probably
have a high percentage
of that maximum gain everyone should
know that
if you're trading and you say i didn't
know that you need to know that that's
option greeks
one-on-one class i think it's actually
probably the sheet they give you when
you walk into the class
okay i know that because i taught the
class okay but i need to make sure that
you understand why an investor is
rolling delta and why are they actually
exiting
look at the delta again okay so let's
kind of finish also on this point which
is actually getting into
an example here and i think this is a
nice example okay
so first off what i'm going to do is i'm
going to bring up an example of a stock
the paper money account has a stock
okay and it's a small one called
work day okay now workday
last week really had a quite a bit of a
jump okay
work uh this paper money position is a
hundred shares of stock
now some investors they might look
for stocks that have had big moves
off support and i'll show you what that
looks like in just a sec but
the ticker is work day 100 shares of
stock it was initially
about 18 000 worth of stock now when you
pull
up the chart work day so here it is
now what you're going to notice is we we
kind of talked about
this one as it may be a potential cup
and handle
now it doesn't have the base i know pat
just rolled his eyes like cup and handle
i'm a charter market technician we
talked about that on twitter
so pat if you rolled your eyes i know so
you're going to see it pull back didn't
have a horizontal support
ran up pull back still kind of had like
a cup there
like a handle i should say on the right
hand side
similar but we would say there's not
really a base okay
which unusual chart now the stock
actually breaks to the upside
and now that stock is a little elevated
off
what was old resistance now historically
i'm just giving credit where credit is
due
bill has always talked about
historically when stocks get
elevated off support this is where some
investors might try to profit take
this is where the stock might try to
consolidate
some of the recent price move now if the
investor is forecasting
then maybe that stock might consolidate
a little bit
the investor might decide to say look
the portfolio has
a hundred shares of stock could the
investor maybe
sell a covered call try to collect some
premium now what you're going to notice
is in the stock
section of the portfolio how much
theta is there well it's a round donut
you don't see any theta in there because
these are just stock positions
but one thing that's kind of nice is
when these stocks go up if they did
there could be some good premiums to
sell a call let's take a look
so if we go to actually work day let's
kind of talk about the expiration first
off
so number one what is the reason for
selling the cover call
well the reason is the stock massively
gapped to the upside
probably about 30 points off of where
old resistance was
maybe that stock tries to consolidate
some of that recent move
and the idea here is could the investor
in the shorter
term okay could the investor in the
shorter term
try to sell a call to collect some
premium
now first off notice the language that
was just stated
in the shorter term okay so the idea is
not to sell a call out to christmas time
because if the stock gapped up as much
as it did there might be a chance where
that stock might try to go higher over
time
so this is in the shorter term here the
paper money account is looking at the
monthly option okay with 18 days left
so here's the idea it's trying to sell a
call
shorter dated where there's less time
for the stock to get above the strike
now whatever strike the investor sells
so this current stock price is at 240
when we talk about selling calls with a
delta of 30 to 40
that means that the strike that is
selected is
above the current stock price right now
so the stock is at 240. if the investor
sells something like a delta of 36 here
and there's only one of those that has a
delta of 30 to 40
that would really be the 250
strike now what the investor needs to
understand is if the stock is at 240
here
and they sell the 250 they still make 10
more dollars
okay they still make 10 more dollars
okay
and now what you're gonna notice is but
the investor also gets
five dollars and fifty cents on top of
that
so it's like making up to 250 plus
550 okay and now what you're going to
see is it's like making up to 255
and 50 cents which is 15 more dollars
even after the jump
now this weekend i met a guy playing
tennis
he was talking to me about how he liked
to do cover calls and when he was
talking i said man
the way you're making that sound if
those stocks close above the strike
price makes me
makes it seem like you're maybe like an
only child
and he like didn't laugh and and i said
well if you sold that call and you got
eight percent
more on top like that really frustrates
you and he goes yeah yeah
i said well are you an only child and he
goes i am actually an only child so it's
all about you
okay now he laughed he laughed
afterwards but sometimes
investors don't think this through wait
it can make
15 more in 18 days let me really run
that through
okay so here's the deal the investor is
not trying to make
theoretical profits they're trying to
make profits remember what is the way
the investor can make the most amount of
money in the short term on a cover call
it's by having the stock close above the
strike
okay now if the investor already
owns the cover call so excuse me they
already own the shares
how do they just sell the call well they
just sell the call by
simply clicking on the bid of the option
or the bid on the strike price that they
want to sell
so if they click on let's say that 535
just click on it
it's just going to bring up a single
option order
the 100 shares are in the account okay
this is saying single cell minus one 250
535 dollars now if you kind of take 535
dollars
and spread it out evenly over 18
over 18 days on average that's
29 a day in time decay
that's being sucked off the value of
that option
if that stock actually closed above
closed if that stock closed above 250
and then got five dollars and 35 cents
on top which would be about 15
more from where it is here do you think
the paper money account be mad no
matter of fact we'll even the paper
money account will even cheer
and say blow up off get above that 250.
surprise the paper money account
so having the stock close above the
strike is not necessarily bad
that's the way in the shorter term it
makes the most
amount of money okay
now in this case let's say the investor
were to push the price to the mid price
of
250 okay confirm and send
now here's where it kind of gets a
little confusing for some people where
they say hey
james this is showing maximum loss okay
why this order is only thinking
that the account does not have the
shares
or it's only looking at selling a call
by itself
but remember this the paper money
account has
the shares therefore it's a covered call
okay so you don't really need to look at
max loss infinite okay
max losses if the stock were to go to
zero
okay there it is there's the credit
there's the commission
if that's okay the investor now could
say
send the order and there it goes let's
see if that actually fills
okay so it fails 550. so now what you're
going to see is
sold a cover call on workday when we go
down to the position what you're going
to notice is there it is
100 shares of stock and there's the
covered call
now by the way if that volatility were
to let's say go up a little bit like
we've been seeing in the vix
the consideration of selling some calls
might not necessarily be bad for a stock
investor if they're thinking that stock
might try to consolidate a little bit
and or pull back
guys and gals we've seen this too often
where when the volatility actually
starts to go up investors deer in the
headlights
they don't understand what it means the
volatility actually starts to go up
that means stocks probably start to
consolidate which is more of the cover
call strategy
the risk is also if the investor thinks
that stock might pull back a little bit
the investor even might try to be more
aggressive
in which strike they sell and what i
mean by that is
the investor might say you know what i'm
going to pick microsoft and i'm going to
i'm just going to go to your questions
right now
but let's say the investor thought you
know james i think the market or the
stocks might pull back
we talk about initially selling a call
with a delta of 30 to 40.
if the investor thought there might be
more of a consolidation and want to be a
little bit more aggressive
with the of trying to at least get a
bigger premium which is the protection
or even selling something let's say one
strike in the money for greater
protection hence bigger premium
some investors have experience consider
that especially when the volatility
is starting to ramp up today's
volatility if it were to close here
would be the highest it would be at
closing at the highest point of the day
okay so keep an eye on that understand
that's when the investor might
vary the strike that they're picking now
what i want to do is i want to kind of
just go straight
to your questions okay now the comment
was from
uh was james does the investor lose 550
if the stock closes
above 250. so let's go back to that
order so
if we go back to the order of workday
remember
the investor makes up to 250 let's just
draw this
they go from 240 up to 250
okay so we're just saying from where it
is now so that means the investor gets
another ten dollars
now by the way the paper money accounts
unrealized gain is about five thousand
we're just saying from where it is now
about ish
250 they get that additional 10
okay but if that stock were to close
above the 250 do they still
get to keep the premium yes
that's what the investor gets to
obligate themselves
to be a seller of those shares
from now until expiration
so here's what the investor would
probably love i know
let's say someone tomorrow said hey i
want to buy
the stock at 250
and could someone come in and take the
paper money account shares
prior to expiration yes
where does the paper money account get
to sell the stock at 250.
does the paper money account or the
investor get to keep all the premium
yes i know you're thinking how could
that happen to the investor sooner
supposedly it's random right someone has
to be on the other side
where they exercise their right to buy
those shares at 250.
the paper money account is the seller
so the paper money account is standing
ready and willing to anyone in the world
and saying if you want to actually buy
the shares at 250
come get them and by the way bring the
10 and also bring the 550 on top and
then you can have a nice day after that
that's really what the paper money count
is doing now if that stock were not to
close above the 250
you just get the stock appreciation or
whatever happens with the stock
and you still get to keep the 550 okay
so it's very important with so many
stocks
at near some highs there's probably some
good premiums and by the way when you
look at the vix
when you look at us a lot of stocks
implied volatility there's probably some
decent premiums out there to collect
this is not a market where the vix is at
10 or 12 and there's no premiums
that's not the issue okay all right
now the one thing i also want to bring
up if you said james i really kind of
need to kind of
hone the skills of that technical
analysis
starting tonight john mcnichol
will be starting a class tonight the
virtual workshop
uh be kicking off tonight it's a
four-part series
and you're gonna see the layout you're
gonna see that it kind of talks through
day one through day four
that starts tonight and it's at 7
eastern
if you don't know about that you can go
to the td ameritrade website
go to education and go to workshops
not webcasts workshops and if you
actually
do that you can actually see you can
register for that event
want to make sure you know about that
now coming up in just
a moment we'll also be having a class
actually done by ken rose
on managing a self-directed portfolio
now the trades we followed through of
the
boeing and the dow trades from last week
this week today the orders that we're
actually showing were
the paper money account bought back the
zoom
d risk did not hold that trade over
earnings
number two the paper money account
rolled the option
on paypal and then sold the option
sold the cover call of workday
okay so those were the trades that were
done here today so expect every time you
come to this class
we're going to follow through on the
trades that were done this class to me
that
actually deepens the impact of what
you're being taught
and what you're learning so that way you
can follow through and see how the
trades are doing
the trade goes good we'll talk about if
it goes sideways we'll talk about it
if it goes down we're going to talk
about it okay so hopefully that's
helpful for you
i want to also thank you for your
comments and your questions
if you learned something here today if
you had a little fun okay
give this video actually a thumbs up
know that also i'm appreciative for pat
answering as many questions as possible
in the chat
thank you so much for your comments and
your questions i try to answer as many
as possible
and also stay tuned for ken rose who's
coming up just shortly
i also want to give a quick reminder
that in this class
we demonstrated the strategies two of
them covered calls and short puts
we also talk about how the investor
could take these strategies
and apply them on the platform and
that's done for educational purposes
also understand that any investment
decision you make in your self-directed
account
so your responsibility it's been my
absolute pleasure as we get together
every monday
for what we call income monday as we
talk about covered calls
and short puts which for many investors
might be two main option strategies
they might consider especially as a
stock investor so with that said
i want you to have a great day stay
tuned for ken rose coming up at the top
of the hour
with that said take care bye
you
