In this video we take a look at another way of profiting from a market sell off, using a combination of cash secured puts and covered calls to earn cash from options premium selling in an easy to understand process.
If you missed part 1 you can watch it here
View Video Transcriptthe coronavirus has shaken up the
financial markets in a way that it’s
rarely seen over the past several weeks
mainly because of the uncertainty over
how bad this epidemic could get and more
importantly to the markets how much its
ramifications will create economic
damage to the world economy it’s exactly
this kind of uncertainty that causes the
options market to experience huge spikes
and implied volatility which is the main
factor that drives the pricing of
options
I’m the head trader of SMB capitals
options trading desk and right here at
SMB’s trading floor in Manhattan I have
the privilege of working with
spectacularly successful options traders
that know how to exploit market panics
just like we’re experiencing right now
in our last video we talked about just
such an opportunity namely selling puts
when the market has experienced a huge
spike in volatility in this video we’re
gonna take that discussion one step
further and look at what would have
happened if the market had sold off so
hard that the short puts that we sold
went into the money and we were assigned
the shares that those short puts
represented if you’d like to learn how
to make even more money from your
options trades when that exact situation
unfolds and stick around because I think
you’re gonna find this very interesting
[Music]
hi I’m Seth Freuburg and 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
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investors all over the world they’re
really very valuable okay so if you’re
even remotely watching the financial
markets I don’t have to tell you that
the market has gone into a somewhat
unprecedented period of volatility based
on concerns about the coronavirus and
its economic implications over the past
few weeks the market has experienced
some of the largest point moves in the
major indexes in the history of the
stock market and in our last video we
discussed selling spy puts in that kind
of environment and how quickly those
trades can work out in a very profitable
way today
we’re gonna look at that trade from a
different perspective and that has to do
with the case which certainly will
happen now and then where you sell puts
when the markets going down looking for
a fast profitable trade and instead the
market sells off past the puts that you
sold and you actually get assigned the
shares of stock to which the puts
pertain so before we go any further
let’s make sure that everyone listening
has a full grasp of the way stock
options work if you already know how
options work or you watch the last video
this is gonna be super quick so hang in
there
so what’s known as a call option on a
stock entitles the buyer of that option
to purchase 100 shares of that stock at
a certain price called the strike price
of that option regardless of what price
the stock is trading at what’s called a
put option on the other hand entitles
the buyer of that put to sell 100 shares
of his stock he owns at the strike price
of that put again regardless of what
price the stock is trading the buyer of
the option pays what’s called a premium
to the seller of the option because the
seller of the option is taking the risk
that the stock will go past the strike
price of the option in which case the
buyer can exercise his option and the
seller could lose money on the
transaction but if this
stock on the expiration day of the
option is not beyond the strike price of
the option then the seller just pockets
the premium that he was given by the
buyer he walks away completely free of
any obligations the options in other
words expire worthless because it was
never triggered so what we’ll be talking
about in this video is where we are
selling put options below the market and
collecting a premium for doing so if the
market does close below the strike price
of the put options we sell we’ll be
obligated to buy the shares at the
strike price of our option even if the
stock price has dropped well below the
price that will be obligated to pay for
them so like we discussed in our last
video the market was crashing downward
the morning of February 28th and at
around 10 a.m. we sold three puts on the
Spy’s that were due to expire that day
and those puts were very far out of the
money at 277 by the end of the day the
market had bounced and those puts
expired worthless but what if the market
had continued to sell-off and the spy
closed below those puts that we solved
well in that case we would have been
obligated to buy those shares at the
strike price of our put option at 277 so
what we’ll be doing in today’s lesson is
taking a look at how many options
traders would handle that situation once
they own the shares that were assigned
to them so to do this we’re gonna be
looking at another case in the past and
so let’s go back to December 21st 2018
and as we can see the market was selling
off that month down 16 percent in fact
from its all-time highs at that time and
so you decided that the market was cheap
enough and that you’d sell three of the
245 puts for a dollar 21 each so to be
clear on that calculation if you sell
three puts for a dollar 21 each each put
represents 100 shares of stock so as you
can see from the calculation you’d have
received 363 dollars for that so now
let’s think about the position that the
traders in if by the end of the day the
spy closes above 245 then he’ll simply
pocket that 363 dollars and have made a
successful trade on the other hand if
the market closes below 245 then he’ll
be assigned those shares and be required
to buy them at two
45 now before we get into how this trade
turned out in the unique way that this
trader was able to use options to turn a
very nice profit I wanted to let you
know that there are sound viable
long-term techniques for trading options
for income that go way beyond this
strategy that we’ll be discussing in a
minute and in fact we are currently
running a to our free intensive workshop
at the moment where we’ll be teaching
you three of those strategies that real
professional options traders use
including a really simple but incredibly
effective strategy that some of the
greatest investors in the world like
Warren Buffett use all the time plus an
options 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 okay so
now at this point the trader had sold
his three puts and collected 363 dollars
and so if we move to the end of the day
you’ll see that the spy closed at 240
and so the owner of the put would have
exercised his right to sell you his spy
shares at 2:45 because he’d make about 5
dollars per share from that transaction
because his shares were valued at 240
but you were required to buy them at
2:45 so at this point you’re now long
300 shares of stock now if you really
have a conviction that the stock will
bounce then you’re happy that you’ve
been assigned these shares and if you
are right then you collected 363 dollars
plus you now own a stock that you’re
very bullish on at a great price at that
point you could simply hold those shares
and that would have turned out pretty
well as a matter of fact when you
consider that the spy traded up as high
as 339 at which point you would have
been up over $29,000 on the trade at its
highs on the other hand if you didn’t
want to type or capital on the spy trade
for whatever reason you had another
alternative you could have chosen and
that was to instead exit the spy Channel
as the covered call technique so let me
show you how that could have played out
so on the day after you were assigned
the shares you could have sold three
calls at 2:45 at the same price you had
to pay to buy those shares now this is
done intentionally because if you think
about it if the owner of the call
decides to exercise that call right that
he has bought he’ll have to pay you 245
for those shares well that’s exactly
what you paid for them so that’s a wash
so the only thing that would be left is
the premium that you received for
selling the calls so let’s take a look
at the cash flow that we receive from
this exercise to make it clear as we
discussed before we received 363 dollars
already from selling the original three
puts that caused us to be assigned the
shares to spy in the first place but
remember now we are also receiving cash
flow from selling those covered calls in
the amount of 525 dollars for a total of
eight hundred eighty eight dollars so
now keep that cash flow in mind because
four days later on the expiration of
those calls you’ll see that the spy had
rallied to 247 and so the owner of that
call is obviously going to exercise his
call and those shares will be sold to
the call owner at 2:45 at the very same
price you were required to buy them from
the guy you sold the puts do earlier in
the trade when you were assigned those
300 shares of spy at that price of 245 a
share when the shares were trading for
much less in the open market and so
naturally when you set the location of
your covered call you did that
intentionally at the price that you paid
for them so that you would not suffer a
loss on the shares if your shares were
called away so then what’s left well
your shares are gone but the $888 you
collected by selling the puts and the
calls
those are yours to keep so now before
wrapping up I wanted to reiterate
something very important this entire
campaign started with the notion that
you were very happy to own spy shares at
2:45 because you thought that if spy hit
that level it would certainly bounce so
you didn’t actually care if you just
collected the put premium and weren’t
assigned to shares because you would
then just pocket the put premium
conversely you were also happy to be
assigned the shares because you consider
that to be a great price to own them and
at that point then you’re in the
driver’s seat you have pocketed your put
premium and now you can either hold the
shares and benefit from what you believe
is going to be a bounce which actually
would have worked out really well here
because spy ended up at 393 like we
discussed it earlier or alternatively if
you didn’t want your capital tied up
with the spy shares you could always
exit them through selling a covered call
like we showed you in this example and
pocketed some additional income from the
call premium as we just demonstrated
either way you’re a happy camper and
this is a great example of the
flexibility and creativity afforded to
you by options trading now just to
remind you as I said earlier if you
enjoyed this video and learn something
valuable from it and 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 go ahead and head 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
* no relevant positions