Covered calls, if intelligently employed, can generate significant monthly cash flow for long and short term stock traders. In this video, we provide you with a vivid example of how the covered call works and why.
View Video Transcriptone of the common frustrations for
traders and investors is the fact that
so many great stocks don’t pay dividends
so they can’t draw any current income
from a stock that they love and they
want to continue to hold
I’m the head trader of SMB capital’s
options trading desk here in Manhattan
and we are frequently approached by
traders who are seeking ways to create
cash flow from stocks they own but don’t
pay dividends in this video we’re gonna
show you a surprisingly powerful example
of how you can create serious amounts of
cash flows from a stock you own even
though it doesn’t pay any dividends at
all so if this is one of your
frustrations and you’re curious about
how this can be done then I’d stick
around because I think you’re gonna find
this interesting
[Music]
hi I’m Seth Freiburg 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
I’d like to suggest that 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 one of the most
popular trading stocks is is our G
Intuitive Surgical which has been on a
incredible tear over the last five years
as you can see from this price chart now
nearly quadrupling in price over the
last five years that’s an impressive
performance but did you realize that is
our G does not issue a dividend at all
well there’s a solution to this problem
and it’s called a covered call
so let’s first try to understand how a
covered call works and then we can delve
into exactly how we could have applied
this to is our G over the last few years
so let’s start by reviewing the basics
of what a call option is so that there’s
no confusion when I explain how this
strategy works if you already know how a
call option works don’t worry this is
gonna be quick and then we’ll jump into
the guts of the lesson 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 the price of the
stock is trading at before that option
expires the buyer of a call 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 but if the stock on
the expiration of the 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 option in other words
expires worthless because it was never
triggered so let’s say hypothetically
that XYZ stock is trading at 100 so
let’s say that there’s an option chain
30 days out from today for XYZ and we
find that the option to buy XYZ for
five dollars in 30 days costs 80 cents
then that option would cost the buyer 80
dollars because it represents the right
to buy 100 shares of XYZ and so you need
to pay 100 times 80 cents to buy the
option which is $80 now moving out 30
days.if XYZ stock closes on the day the
option expires at 105 or less the option
expires worthless and the seller for the
option just pockets the $80 in the buyer
of the option just lost $80 on the
transaction however if the stock trades
up to say 107 then the sellers required
to sell to the buyer his shares of XYZ
company for $105 even though they’re
trading at 107 so in that case the buyer
would make a profit from having bought
the call because he paid two dollars
less per share for stock than it’s
actually worth and he paid 80 cents for
that option so he made out on that one
so those are the basic workings of a
call option so let’s say that it was the
middle of January 2019 and you had
decided to buy 100 shares of is RG which
at that time was trading at five-thirty
206 your premise was that you were
optimistic about the stocks prospects
and at the same time you wanted to get
some income from this stock even though
it doesn’t issue a quarterly dividend so
the same time that you bought those
shares
you sold a call about 5% above the price
which is at approximately 560 and that
call expires in about a month now on
that day the is RG February 15th 560
call was priced at seven dollars and
seventy cents and it expires in a month
as you can see so now let’s take a quick
look at how your broker will treat this
transaction so you’ll pay fifty three
thousand two hundred six dollars for the
hundred shares but because you sold that
call at five sixty you’ve received cash
flow of seven hundred seventy dollars
because the price of the call was seven
seventy per share and each call
represents 100 shares so you’ll receive
one hundred times that or seven hundred
seventy dollars so that’s how the trade
starts now let’s move forward to the day
the option expires on February 15th and
you’ll see that is our G rally
slightly to 545 but didn’t get up to 560
so your 560 call expires worthless why
because that 560 call is a right for
someone to buy the shares at 560 which
they’re obviously never going to
exercise because the stocks trading at
5:45 so that’s seven hundred seventy
dollars that you collected for that call
because you took the risk that you’d
have to give your shares up at five
sixty even if the shares were trading
much higher that call premium that you
got since the call option expired
worthless you get to keep the profit
from that premium and pocket the seven
seventy well if you do the math on that
after owning the stock for about a month
you have effectively paid yourself a
dividend of 1.4 percent on a stock that
does not pay a dividend and you
accomplished this in one month so having
attained a 1.4 percent return in just a
month suppose that we decided to do this
same thing every 30 days right up until
last month December well let’s take a
look at how that would have turned out
now before we do that though I did want
to mention that we’re currently running
a to our free intensive workshop at the
moment where we’ll be teaching you three
more real-world option strategies that
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 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 okay so let’s take
a look at how this program is selling a
call about 30 days out and about 5%
above the current market of the price of
the stock would have played out month
after month
so the next week after February 15th
call expired
we sold the March 15th call about 5%
above the market now remember is our G
was trading at 5:45 at that point so the
call we would have bought 5% above the
market is the 575 and that one sold for
$395 as you can see $3.95 times the 100
shares it represents now if we move to
the expiration of that option on March
14th you’ll see that is our G actually
did rally to 558 so while the stock
rallied it didn’t quite make it to 575
and so that call up at 575 is obviously
going to expire worthless as its above
the stock trading price and therefore
wouldn’t logically be exercised so now
doing the math for the first two months
you’ll see that we made another 395
dollars from that march call and
therefore we’ve made a total of 1,000
$165 for the first two months bringing
our two months return 22.2%
now that’s not bad given the fact that
the stock doesn’t issue a dividend at
all and in less than two months we’ve
collected the equivalent of a 2.2
percent dividend while the average
dividend for the entire sp500
is 2% per year so we’ve already exceeded
that in two months on a non dividend
paying stock now in April the call 5%
above the market is the 590 and we get a
premium of 617 dollars for that one as
you can see if we again move forward
another 30 days you’ll see that is our G
actually sold off in this case and so
obviously the short call will expire
worthless as its way up at 590 way above
where the market where the stock is
currently trading and so now our score
card after 3 months is over $1700 in
income and a return of 3.3 percent now
so that you won’t be bored running
through each month in detail I can
you that the year would have come out
like this having collected six thousand
seventy seven dollars by selling a
covered call 5% above the market every
30 days and allowing them in almost
every case to just simply expire and
that constitutes a return of eleven
point four percent for the 12-month
period on a stock which remember pays no
dividend at all now there will be cases
where the stock will take off to the
upside and the owner of the call will
exercise his call and your shares will
be sold for a price lower than the
current price but if that happens you
just buy back your shares immediately
and resumed your call selling program
that actually would have happened you in
October but you’ll see that you could
have bought the shares back at a very
slight increase in price and just
continued your call selling program and
the results would have been exactly as
we’ve Illustrated so what I hope that
you’ve learned from this video is the
fact that with just a little bit of
options knowledge you can turn a non
dividend paying stock into a generator
of cash flow that in this case beat the
hell out of the return of almost any
dividend paying stock you could think of
and was more than five times larger than
the average stock on the S&P; 500
so that’s just one pretty simple example
of the leverage and flexibility of using
options to enhance the returns in your
trading and there are far more powerful
techniques than this one in reality 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 more
real-world option strategies that
professional options traders use all the
time then check out the free options
class that we’re currently running just
go ahead and click the link that’s
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
com to register for this free intensive
workshop it’s really 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 it’s your
turn what I’d like you to do is look at
some of your favorite trading stocks and
if you have access to the 2019 data run
this same program every 30 days starting
in January 2019 and running it through
the end of December 2019 and see how
much cash flow you could have generated
from your favorite trading stocks if you
had held them all year now you want to
pick a stock trading at greater than
about 300 as own stocks less than that
the Commission’s for such a program
start to become a factor and cuts into
your returns I’d be curious what you
come up with so after you do your
research comment below if we find some
interesting examples we can do another
video to show you what other subscribers
in our community have come up with I’m
anxious to see what you can come up with
* no relevant positions
