After the crash in March, most traders are looking for techniques get long stocks that have been beaten down by the market and constitute bargains in the long term. In this video, we show you a technique to double your returns on those kinds of trades with a simple options technique that most investors and traders should know.
View Video Transcript2019 was an incredible year for the
Spy’s stock which is as you probably
know the ETF that represents the S&P 500
it was up over 28% during calendar year
2019
but the market tumbling nearly 20
percent in the fourth quarter of 2018 it
would have been pretty logical in the
context of the longest bull market in
history to have gone long the spy at the
beginning of 2019
I’m the head options trader SMB Capital
here in Manhattan and I can tell you
that there were plenty of traders at our
firm thinking the same thing in early
2019 and making pretty large bets along
those lines so I’d like to show you an
extremely simple way that you could have
more than doubled your spy returns in
2019 yet done so taking much less risk
than outright buying shares of spy if
that idea interest you don’t suggest
you’d stick around I think you’re gonna
find this pretty eye-opening
[Music]
hi I’m Seth Freiburg I’m the head trader
of SMB capitals options trading desk SMB
capital is a proprietary trading firm
located in midtown Manhattan and we
provide capital for options and equity
traders from all over the world trading
both remotely and in our offices here in
New York City now I’d like to suggest
you click on our subscribe button right
now so that you don’t miss any of our
free trading videos that we produce for
traders and investors all over the world
they’re really very valuable ok so as a
result of the kovat 19 pandemic the
market crashed in March and while there
obviously is a lot of uncertainty ahead
of us I think we can all agree that the
world will eventually return to some
semblance of normalcy and the economy
will bounce back since pretty much every
stock in the world is on sale right now
compared to their prices just two months
ago it might be handy for you to
understand a technique for substantially
increasing the returns that you can make
on equities and I’m going to show you a
vivid example of that in this video now
before we jump into that we’ve got to
make sure that everyone understands the
basics of what are called call options
for those of you who already understand
options basics
hang in there this is going to be very
quick and then we’ll jump in to the
principles of the lesson okay so most of
you have probably heard of a call which
is a security that allows a trader to
buy the right to purchase 100 shares of
the stock at the strike price of that
option before that option expires so for
example the April 29th spy 300 call
entitles the buyer of that call to
purchase 100 shares of spy at $300 per
share any time before the option expires
on April 29th
even if spy is trading at a price much
higher than 300
however the spy closes it less than 300
on April 29th then that call expires
worthless and the call seller gets to
just pocket the options premium which is
the cash that he sold the call for and
he has no further obligation okay so now
that everyone understands how call
options work let’s say that you wanted
to get long the spy at the end of last
year you could have simply bought 100
shares of spy it to close On January 2nd
which was the first trading day of 2019
and on that day spy closed at $250 and
20 cents and so you’d be paying $25,000
$25,000 to enter that position or
alternatively you could buy the spy 1:30
strike price call which is what is known
as a deep in the money call for $120 in
99 cents that day
now that call entitles you to buy shares
of spy at 1:30 which is why they’re so
expensive because spies trading much
higher at 250 and because of the fact
that they entitle you to buy 100 shares
of spy you multiply the options premium
of $120 and 99 cents times 100 to get
the cash outlay you’d have to make to
buy that call and that comes to 12,000
99 dollars so as you can see the cost of
that deep in the money call is less than
half of the cost of the 100 shares of
spy and so you’re risking less than half
of what you paid for those spy shares in
the same basic directional trade now the
spy pays a dividend which over time
averages a little less than 2% so the
owner of the spy shares would receive
about $500 during the year for his spy
investment so in order to replicate that
2% return the call buyer decides to
engage in what is known as a synthetic
covered call program every month so what
he’ll be doing here in January is
selling the 270 call that expires at the
end of the month which as you can see is
priced at 20 cents now what that means
from a cash flow standpoint is if you
sold the January 30 2019 call you’d
collect 20 cents times 100 because each
option reflects the right to buy 100
shares of spy stock at that 270 price so
your account would be credited with $20
for the January call now let’s move
forward to the day that that first sold
call option expires on January 30th and
you’ll see that spy closed at around 267
and therefore the call expires worthless
why because the to set the to 70 calls
the right to buy 100 shares at 270 on a
stock trading at
to 67 so obviously the coal buyer won’t
exercise that right and so it simply
expires worthless in the trader simply
pockets the $20 and has no further
obligation so the concept is that if he
does this every month selling the calls
that are worth around 20 cents each
month which are usually 10 to 15 points
above the market it turns out for a
minimum of 20 cents then he’ll get $20
per month minimum and his account for
having sold these calls and at the end
of the year he’ll have at least $250
which that was intentional because that
would equal about 2% on his original
call which is slightly over $12,000 as
we mentioned earlier replicating the
dividend he’d get if he had actually
bought the spy shares so going into the
next month we now sell the twenty cent
call that expires at the end of February
which in this case is that 283 call
expiring February 27th and so moving
forward now to February 27th we’ll we’ll
see that spy closed at around 279 and so
the 283 call obviously has no value and
so that expires worthless as well and
you’ll also note that the call that
expires in January of 2020 has now
appreciated to 149 57 so taking stock of
where we are at this point we’ve
received $20 in the first two months of
our synthetic covered call program plus
as the Spy has rally strongly since
trade initiation the long January 2020
call is now up to over $149 having
originally paid roughly 121 dollars for
it so from this point onward we do this
each month in 2019 selling a call option
that yields about a $20 premium or more
and allowing those calls to expire
worthless now before we get into how
this synthetic covered call trade turned
out I wanted to let you know that there
really are sound viable long-term
techniques for trading options for
income and in fact we’re currently
running a – our free intensive workshop
at the moment we’re will be teaching you
three of those strategies that real
professional
options traders use including a really
simple but incredibly effective
technique that some of the greatest
investors in the world like Warren
Buffett use all the time plus an options
trading strategy that has a statistical
80 percent probability of profit month
in and month out plus an option strategy
that you can employ with the stock that
you like where you’ll make your target
profit whether the stock goes up goes
nowhere or even goes down a small
percentage so if those strategies would
be of interest to you then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that will open the free
registration page in a new window so
don’t worry you won’t lose this video or
you can just head on over to options
class com to register for this free
intensive workshop it’s a rare
opportunity for retail traders and
investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it ok so back
to our synthetic covered call program as
we run through the entire year the
results look like this as you can see by
collecting about $20 per month
we collected 252 dollars for the year
and by the end of December of last year
the January 2020 call that we bought in
early January of 2019 is now valued at a
hundred ninety one dollars and 40 cents
by the end of the trade so now let’s
take a look at the economics of
expressing our bullishness through this
synthetic covered call program on the
final day of the trade the spy closed at
three hundred twenty one dollars and
thirteen senses and as you can see the
shares were worth thirty two thousand
one hundred thirteen dollars at the end
of the trade for a profit on the shares
of a little over seven thousand dollars
assuming a two percent dividend on the
original cost of the spy shares you’d
have collected you’d have collected
another five hundred dollars during the
year for a total of seven thousand five
hundred ninety three dollars whereas
with the January call on half the
investment there was an a slightly
greater gain as the call had appreciated
to one ninety one forty four a profit of
over seven thousand three hundred
dollars on a long
January 2020 call and another 252
dollars collected from the covered call
premium rating program which comes to
just about two percent on the original
twelve thousand dollar investment in
that long January twenty twenty call
again replicating the dividend you would
have gotten had you actually bought the
shares the total profit from the
synthetic covered call program then was
almost exactly the same as buying the
shares as you can see a little over
seventy five hundred dollars but we need
to focus on something important here and
that is that the original investment
between the two scenarios is
significantly different you see the risk
and the investment in the spy shares is
more than double the investment in the
covered call program and so with the spy
shares yielding thirty percent the
synthetic covered call program yielded
exactly the same amount of profit with
less than half of the risk and a total
return of 62 percent and so this is a
great example of the leverage of options
and so what I hope you take away from
today’s video is the fact that
professional options traders understand
the leverage of options and how to
exploit that leverage to substantially
improve the returns for traders who have
a conviction about the direction of a
stock or an ETF like the spy if you want
to trade like a professional options
trader you need to understand these
kinds of opportunities and learn how to
structure trades like this synthetic
covered call to replicate a stock trade
using the cover called premium to serve
as the equivalent of the dividend you
would have received from owning the spy
shares but by structuring the trade this
way you were able to double double your
returns on your capital earning the
exact same amount of profit with less
than half of the risk now just to remind
you as I said earlier if you enjoyed
this video and learned something
valuable from it would like to learn the
details of three real-world option
strategies that professional options
traders use all the time then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that will open the free
registration page in a new window so you
won’t lose this video don’t worry
or
you can just head on over to options
class comm to register for this free
intensive workshop it really is a rare
opportunity for retail traders and
investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it and please
don’t forget to click on the subscribe
button right now so you won’t miss free
trading videos that we’re posting
constantly on our channel to help you to
improve your game as an options trader
* no relevant positions
