Scribd Logo
Upload

Welcome to Scribd!

  • 683 views

    The Poor Mans Covered Call

    Uploaded by

    Joe D
    The document discusses using LEAPS (long-term equity anticipation securities) and covered calls to allow smaller accounts to profit from trading large-cap stocks that may otherwise be too expensive to purchase outright. It provides an example using Netflix (NFLX), showing how a trader could control 100 shares of NFLX for $8,100 by purchasing a LEAP instead of buying the shares directly for $29,514. It then explains how writing covered calls against the LEAP position could generate weekly income and profits.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    The Poor Mans Covered Call

    Uploaded by

    Joe D
    683 views2 pages
    The document discusses using LEAPS (long-term equity anticipation securities) and covered calls to allow smaller accounts to profit from trading large-cap stocks that may otherwise be too expensive to purchase outright. It provides an example using Netflix (NFLX), showing how a trader could control 100 shares of NFLX for $8,100 by purchasing a LEAP instead of buying the shares directly for $29,514. It then explains how writing covered calls against the LEAP position could generate weekly income and profits.

    Original Description:

    best trading strategy - the long call diagonals

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses using LEAPS (long-term equity anticipation securities) and covered calls to allow smaller accounts to profit from trading large-cap stocks that may otherwise be too expensive to purchase outright. It provides an example using Netflix (NFLX), showing how a trader could control 100 shares of NFLX for $8,100 by purchasing a LEAP instead of buying the shares directly for $29,514. It then explains how writing covered calls against the LEAP position could generate weekly income and profits.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    683 views2 pages

    The Poor Mans Covered Call

    Uploaded by

    Joe D
    The document discusses using LEAPS (long-term equity anticipation securities) and covered calls to allow smaller accounts to profit from trading large-cap stocks that may otherwise be too expensive to purchase outright. It provides an example using Netflix (NFLX), showing how a trader could control 100 shares of NFLX for $8,100 by purchasing a LEAP instead of buying the shares directly for $29,514. It then explains how writing covered calls against the LEAP position could generate weekly income and profits.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 2

    The Poor Man’s Covered Call

    I am sure that many of you have found yourself watching the markets and seeing the large cap stocks
    such as Netflix, Google, Amazon, Facebook and many others make large moves in a single day. And you
    find yourself wishing you had a trading account large enough that you could trade these large cap stocks
    right along with the big boys. But due to your account size you are limited to stocks trading for $100.00
    or less. Well what if I told you that you can trade any size stock even with a small account.

    How you may ask. without having the capital to buy these stocks trading in excess of $1000.00 per
    share. Well the answer is with the help of Options. Options when used correctly can be a very safe and
    profitable tool.

    Now what we are talking about here specifically is what is known in the option world as LEAPS (Long-
    Term Equity Anticipation Securities). These are options that have expiration dates going out over one
    year. Each LEAP represents 100 shares of the underlying stock. So, for every LEAP you purchase you will
    control 100 shares of that stock until the option expires which could be over a year out. So in essence it
    will be as if you own 100 shares (for each option) and just like the big boys that can afford to outright
    purchase the 100 shares you will be able to go along for the ride as you watch these stocks move higher.
    Remember you will have the exact same concerns as the guys that own their shares. You will have to
    worry about the stock price falling just like if you owned the shares. But the big advantage is your cost
    basis if far less than what theirs is and you still get to profit from any moves up.

    Let’s look at an example: Netflix (NFLX) Currently NFLX is trading for $295.14 so you could buy 100
    shares for a total cost of $29,514.00 which might be out or your trading range due to the size of your
    account.

    Or you could buy a NFLX LEAP that would expire in Jan 2020 for $81.00 or a total of $8100.00. That’s
    approx. 27% of the cost of purchasing the stock outright. And you would still be able to participate in
    and gains NFLX made over the next 5 months.

    Another fact to look at is that if you bought the 100 shares outright your max loss would be the
    $29514.00 but in the case of just controlling the same 100 shares through the LEAP your max loss would
    be limited to just $8100.00.

    Now if you did end up holding this position all the way till Jan 2020 and wanted to continue this trade
    you could just roll out your LEAP position to another expiration months out into the future and continue
    your trade.

    Now you can do this with any stock even stock that you could afford to outright purchase but if you use
    this method you could then allow yourself to diversify through a larger basket of stocks than you
    previously thought you could due to your limited account size. Now what if I told you this could get even
    better.

    Another very common trading practice is something called Writing Covered Calls against stock you own.
    In essence you are receiving money from someone for you promising to sell them your stock at a set
    price in the future. So, if the stock reaches that agreed upon price within a specific period of time you
    will have to sell them your stock. But remember that price is above your purchase price, so the result is a
    profit to you. Also let’s not forget the premium you receive for selling that Covered Call option. Now you
    can do this (sell a call) against your stock each week and receive a premium each time you do that. So,
    let’s look at the same NFLX position and see what that could do for us using Covered Calls.

    Page 1 of 2
    The Poor Man’s Covered Call

    First you need to calculate your break-even price. You do this by adding the price you paid for the LEAP
    to the Strike price of that leap:
    LEAP price = $81.00
    LEAP Strike price = $220.00
    Breakeven price would be $301.00 per share.

    So, we would want to sell someone the right to purchase this stock from us at a price higher than
    $301.00. Now as of today’s writing of this Blog we could sell a call option that would allow someone to
    purchase the stock from us at a price of $302.50. If the stock rose to a price equal or above that price of
    $302.50 then we would have to sell them the stock for that agreed upon price. We would do this by
    exercising our leap and purchasing the stock at the price of $220.00 per share and then sell the same
    stock to the Covered Call owner at a price of $302.50. For selling this we would collect $2.50 as of
    current market quotes. But remember we need to add the price we paid for the LEAP of $81.00 for a
    breakeven price of $301.00. This would leave us with a profit of $1.50 a share plus the premium we
    collected of $2.50 for a total one-week profit of $4.00 per share. That would be a one-week profit or ROI
    of 5%.

    Now in the event that NFLX did not increase to $302.50 during that week then the Covered Call option
    would expire worthless and we would keep the $2.50 we collected and sell another Covered Call option
    for the following week for a similar premium. In this case we would have a profit of 3% for the first week
    and continue this week after week until NFLX reached the $302.50 level and the trade would close out.

    So, I have now shown you how to trade in stocks that previously might have been out of your price
    range and how to also generate a nice weekly cash flow selling Covered Calls. If you are interested in
    learning more about this strategy, or learning about any of the other option strategies we teach please
    go to https://www.tradersacademy.org and sign up. Then you will receive each week all our live trades
    and trade updates. Plus you will receive access to group coaching and private 1 on 1 coaching. You will
    also be able to check out the various classes that we offer.

    Page 2 of 2

    You might also like