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In this video, we will look at three common strategies or approaches that traders use when placing Covered Call trades.
Vid Text:
Hello and welcome,
In this video, we will look at 3 common strategies or approaches that traders use when placing Covered Call trades.
The first and most common strategy that covered call traders utilize is to attempt to profit from Theta or time decay. In other words, for this Covered Call strategy, the trader sells an option with the goal of trying to profit from the option losing value each day from time decay.
Each day, as an option gets one day closer to expiring, the non-intrinsic value of the option decreases as there is less time for the option to move to where is is profitable or more profitable. The daily loss of the option's value from time decay is not linear. As the option gets closer to expiring, the daily rate of decay increases and is greatest the last 30 days before the option expires. Therefore, for this strategy, the trader will usually sell a Call Option that has 30 days or less until the option expires.
Options that are right at the money, in other words, options that have a strike price that is right at the current price of the stock have the highest intrinsic value. Therefore, for this strategy, the trader will usually sell the Strike price that is as closest to the current price of the stock. If they feel the price of the underlying stock will rise, they may go 1 strike price higher to maximize their profit, or if they feel the price of the underlying stock may drop, they may sell 1 strike price lower to increase their downside protection.
The next strategy Traders use when placing covered calls is to combine time decay with Implied Volatility. Instead of simply selling an option the last 30 days when time decay is highest, the trader will attempt to sell the Option when both time decay and Implied Volatility are higher, such as selling an Option that expires in 30 days or less right before an earnings report or economic announcement.
Implied Volatility is very high right before a report or release, which increases the price for options. After the results of the report are known Implied V drops. In other words, the price of options are 'marked up' heading into the release, and then the price drops after the results are known.
Therefore, when selecting when to sell the option, the trader will look at both the time until the option's expiration plus any up-coming events that would drive up Option prices.
The 3rd strategy a Covered Call trader will use is to trade a range. For this strategy, the trader will look for an underlying security for placing a Covered Call that is trading in a low volatility, horizontal range. The trader is attempting to sell the Option when the price of the underlying stock is at the top of the range and the Option is priced highest, and then buy the option back when the price has move down the range, and the Option has dropped in value from both the decline of the stock price as well as time decay. The trader will then wait until the stock climbs back up to the top part of the range to sell another Option. Because the trader is selling an Option with the expectation of the price of the underlying stock dropping, he may choose to sell an Option that is In the Money.
The trader may use technical tools such as Stochastics or Bollinger Bands to aid in deciding when to sell the Option, and when to buy it back.
The Trader may place multiple covered calls with opposite overall market positions to try and hedge Delta. In other words, they will place offsetting Covered Calls so they are not effected or are less effected by changes in the price of the stocks they hold.
This is an income producing strategy. In most cases, the trader is not looking to have the option exercised.
For the first strategy, the trader focuses on the rate of time decay and the time left until the option expires.
In the second strategy, the trader focuses on both amount of time left and decay from time as well as any up-coming events that will increase Implied Volatility.
For the 3rd strategy, the Trader looks to generate income by selling Calls on a stock that is trading at the top of a low volatility, horizontal range, and then buying back the Option for less when the stock moves to the bottom of the range.
I hope that you enjoyed this video. Thanks for watching.
Three Covered Call Strategies (Cov Calls Vid 4)
In this video, we will look at three common strategies or approaches that traders use when placing Covered Call trades.
Vid Text:
Hello and welcome,
In this video, we will look at 3 common strategies or approaches that traders use when placing Covered Call trades.
The first and most common strategy that covered call traders utilize is to attempt to profit from Theta or time decay. In other words, for this Covered Call strategy, the trader sells an option with the goal of trying to profit from the option losing value each day from time decay.
Each day, as an option gets one day closer to expiring, the non-intrinsic value of the option decreases as there is less time for the option to move to where is is profitable or more profitable. The daily loss of the option's value from time decay is not linear. As the option gets closer to expiring, the daily rate of decay increases and is greatest the last 30 days before the option expires. Therefore, for this strategy, the trader will usually sell a Call Option that has 30 days or less until the option expires.
Options that are right at the money, in other words, options that have a strike price that is right at the current price of the stock have the highest intrinsic value. Therefore, for this strategy, the trader will usually sell the Strike price that is as closest to the current price of the stock. If they feel the price of the underlying stock will rise, they may go 1 strike price higher to maximize their profit, or if they feel the price of the underlying stock may drop, they may sell 1 strike price lower to increase their downside protection.
The next strategy Traders use when placing covered calls is to combine time decay with Implied Volatility. Instead of simply selling an option the last 30 days when time decay is highest, the trader will attempt to sell the Option when both time decay and Implied Volatility are higher, such as selling an Option that expires in 30 days or less right before an earnings report or economic announcement.
Implied Volatility is very high right before a report or release, which increases the price for options. After the results of the report are known Implied V drops. In other words, the price of options are 'marked up' heading into the release, and then the price drops after the results are known.
Therefore, when selecting when to sell the option, the trader will look at both the time until the option's expiration plus any up-coming events that would drive up Option prices.
The 3rd strategy a Covered Call trader will use is to trade a range. For this strategy, the trader will look for an underlying security for placing a Covered Call that is trading in a low volatility, horizontal range. The trader is attempting to sell the Option when the price of the underlying stock is at the top of the range and the Option is priced highest, and then buy the option back when the price has move down the range, and the Option has dropped in value from both the decline of the stock price as well as time decay. The trader will then wait until the stock climbs back up to the top part of the range to sell another Option. Because the trader is selling an Option with the expectation of the price of the underlying stock dropping, he may choose to sell an Option that is In the Money.
The trader may use technical tools such as Stochastics or Bollinger Bands to aid in deciding when to sell the Option, and when to buy it back.
The Trader may place multiple covered calls with opposite overall market positions to try and hedge Delta. In other words, they will place offsetting Covered Calls so they are not effected or are less effected by changes in the price of the stocks they hold.
This is an income producing strategy. In most cases, the trader is not looking to have the option exercised.
For the first strategy, the trader focuses on the rate of time decay and the time left until the option expires.
In the second strategy, the trader focuses on both amount of time left and decay from time as well as any up-coming events that will increase Implied Volatility.
For the 3rd strategy, the Trader looks to generate income by selling Calls on a stock that is trading at the top of a low volatility, horizontal range, and then buying back the Option for less when the stock moves to the bottom of the range.
I hope that you enjoyed this video. Thanks for watching.
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