Yeah. All the SMB videos do this. They explain the upsides of trading strategies, but hardly ever the downsides or the "what ifs", when things go sidewards or against you. Thing is though, over this kind of time frame and in the example, after a year of lower lows and lower highs in SPY in 2022 and with the end of the pandemic, the "bet" the market would go up was almost a given. So, to have ran this strategy at that time was also practically a given. What needs to be explained is how and when to exit this strategy, when the market doesn't do what you expect it to. And that can be tricky. You might say to yourself, this continuation of the downtrend must stop. But, what if it doesn't? You have to be resilient in your beliefs on what you feel will happen or you have to punt. Best thing I've learned to do is, set a hard stop loss and no matter what, let it hit, if it hits. There will be other bets to be won.
You would want to know the worse outcome vs the big profit you could net in this video. This channel gives you ideas of making big ROI but it does not talk about the possible loss outcomes. Pls do your homework work everyone. Greed can blind you. There’s no easy money.
no traders firms don't have an interest in telling the whole story..... like many in trading they want to sell views so they either ignore or downplay risk and problems
I agree, but risk can be managed too. No trader will sit on his hands as a trade goes south on him. Your real total risk is a calamitous event (airplanes are flown into a skyscraper, nuclear war breaks out in Europe, etc.) while the market is closed. You cannot trade to reduce your loss. The market's next open is 3,000 points lower on the S&P and you're facing (and eating) the maximum loss on your position. These are once-in-a-lifetime events, but the remote possibility of a Black Swan event must be considered when you enter a trade. Leverage cuts both ways. Do not overextend yourself. But the odds are that you will be able to put on this trade many, many times before a Black Swan event occurs. Even then, your accumulated profit should exceed your large loss. And if not? You might consider reducing your position size as your wealth grows. Life is a gamble from cradle to grave and in the Long Run we're all dead, aren't we?
Thank you 🙏💚 But it would be very useful to analyze in such videos: 1. Cases when the price falls and what to do with the purchased CALL if its expiration date is approaching. 2. And how to sell a CALL if the price of the underlying asset has fallen. 3. And how to exit the transaction if the price exceeds the strike price of the CALL sold (calculating the loss).
@@xyz9250 SMB videos hardly ever tell the full story. It's their game to attract noobs. What they say isn't false, but they hardly ever explain the management of risk and that is actually the most important part of trading. They purposely leave it out of these videos. They do, however, have some one-off videos about managing risk. So, to be fair, they also cover risk management to some extent.
Thank you, it is very informative. Assuming you are buying DTM call at 310 , and have a covered call at 425, what happens if the SPY rockets to 450, past your 425 Call at expiry, what will the profit or loss be, thank you.
Your 425 rockets to 450 you lose 25 points. But your 310 also rockets to 450 is now +140 points. That covers price of $101 , and -25 points, and you have 9 points profit. It is because even you have one year away call option at 310, you can sell it any time!
These are great but there is never an explanation of how to handle the different scenarios that arise. What happens when the price closes above the call we sold? Or gets assigned? What happens if the price goes below the call we bought and gets assigned?
I've been using the SCC for over 1 year on QQQ. Overall, it's been a very effective and profitable strategy for me to generate some additional monthly income. Problems arise if the price of QQQ blows past the strike price, which if not managed properly, means you're on the hook to buy the shares of QQQ at market price whereas your cost basis on the short call is the strike price. At the same time the long call would also increase in value which will help hedge this differential, but in the end I don't view this scenario as positive because it's taking away my gains.
You don't get assigned on long options. So, if the price falls below the call you bought, it would just lose its value and depending how long it has to expire may become worthless. The maximum risk is however much premium you paid for the long call. If the price rises above your short call(covered call), then you may be assigned, but you can simply exercise the long call, or close the whole trade by buying back the short and selling the long. Realizing a profit of the difference in strike prices.
Other scenarios like SPY going down should be also explained. Owning the underlying has the advantage that once can hold it for long duration for price recovery specifically an index like SPY. With a long position on a LEAP if there is a big fall in the underlying, the LEAP premium will melt fast and the short position on the call options may not cover that
I understand this concern, but couldn't you say you're protecting yourself better by going with the LEAPS since it costs a fraction of holding Spy while yield very similar results on returns? So while yes, you're constricted by how long you can hold the position for recovery, you're also not having as much capital tied up potentially. You also technically could purchase a 2-3 year out call that would closely simulate holding on to an equity for 1-2 years before theta starts to eat at it significantly to give yourself a chance for the LEAPS to recover. You could potentially purchase a 2.5 years 90 delta LEAPS on SPY for $10k vs $43k on 100 shares of the underlying (at a current market price of $434 a share). Say the market falls 50%, you may be down 5k for the LEAPS (worst case possible the whole 10k) but would be down nearly 22k on the underlying. Just my thoughts and a different way of looking at it.
Also tell when to exit from 100 shares and sold call ? In all your videos please give examples when one should exit from call or put with example Thanks for your video
"Synthetic Covered Call" is what I learned as a "Poor Man's Covered Call" (PMCC). Apparently there's still no standardization around names like these names though, and in a way "synthetic" makes more sense in this case IMO, but they refer to the same trade. And this lack of standardization also applies to what you're referring to as "deep in-the-money" because I don't agree that just two in constitutes "deep" but does constitute "in-the-money" at least.
OMG! I just got into options a couple of months ago and the vocabulary is killing me. Like you say, one person called it a "synthetic covered call" and another "poor man's covered call".
@@melvinbarnes6652 yet another name for it is a Diagonal Debit Spread too. It's gotten better but the lack of standardization around that sort of stuff does definitely complicate the process IMO.
Sorry Seth, this treatment is very incomplete. You can do better than this. In a future presentation, please return with a workup of the pros & cons of this "covered call" approach when we apply it consistently over an extended bear market (same trade but how much would this trade have lost if we followed it during the first 9 months of year 2022).
Much of the profit in this trade is coming from the LEAP, which is strongly benefiting from the bull market result. If that LEAP went upside down, this would be a very different story.
@@eshork Getting upside down in a leap is bad. You can only lose so much but you can evaporate the premium you paid very quickly in a crashing market. The value of the leap adjusts much faster than you can react and you can lose your entire principal in no time. Leaps give you leverage with a risk attached; in a turbulent world you are asking for trouble. so much easier the last ten years.
knowing your exit strategy is critical. for this I'd set an alert on the underlying stock at the price that represents around a 20% loss in the long call's value. at that point you can exit all positions or roll positions to reflect the downturn in the underlying stock. SMB usual covers exit and downside risk assessment in their videos.
Seth, you made a big math error for the Synthetic Call Option return. It's really 48.67%! You used the value of the 310 Call, rather than campaign net cost as you did in the first example. So 4,526/9,300. But the Comparison page has different numbers for costs and profits? Why? Also, you should have at least touched on the issue of option decay, even if you were using a LEEP because by the end it was essentially a standard 3 month call at that point.
turbo charged gains, huh? I wonder if the losses are turbo charged as well. Notice that they do not give you an entry or exit strategy. Be careful of prop trading academies...
Yep totally agree. I look at it more as a way to get the same return on less cash outlay, as opposed to doubling my return. Because even though the outlay was 1/4 of buying the stock, when the underlying goes against you, you lose at the same rate as owning the stock. Long way of saying you are more leveraged, so be careful before you use this as a way to increase position size. But I still like the synthetic approach these days to get same exposure but leave 75% of the cash sitting in my brokerage account making 5% interest while I have the synthetic trade on.
The significance of 7.5% is specific to the SPY. The annual average return of the SPY is about 11%, so he's setting 7.5% four months out as a point of where either a) he's very happy to sell, or b) a hard to reach target so the options will expire worthless so he can keep the premium yet still have the premium by high enough to be worth doing. This should be a different percentage with other indexes or individual stocks.
I got to the end of the video and there are huge gaps left out, unfortunately. What if the SPY closed above the strike of 425 and the person buying your call exercises the call? Aren't we still talking about a $43,000 purchase? Or at least a $31,000 purchase if you end up exercising your $310 ITM call to cover the shares that are due to the buyer of the call. Tough lesson to learn once a new trader realizes that their sold calls don't always expire out of the money.
@@シンジ-o6d It doesn't matter. What is important is, you don't have any longer term downtrends in either ETF's value, for the longer term, which is almost a given not to happen over an 8-month period. A long term downtrend is a very rare occasion in stock market history.
Probably things you already knew, but yeah, Poor man's covered calls or just normal covered calls are usually successful. Just like cash covered puts and bull credit spreads are usually successful too (when done correctly).
Risk TLDR: you only risk the price difference between the stock price and your long call strike, but f it crashes, you can feasibly lose 100% of it if you dont cut your losses in time. The risk of this strategy is in the loss of your invested capital since the lomg ITM call has no intrinsic if the market crashes. Should the underlying go below the margin on your long call (as in, the difference in price between tje stock and you option to buy it at) it will drop to zero, whereas if you own the stock you only lose the difference. It is still a better overall strat if you dont care about the stock, since you basically only risk the price difference, but stand to make nearly the same profit. Its just that relative to the size of the investment, the loss can feasibly reach 100%, whereas a stock is very unlikely to be outright delisted unless the company goes under.
All US three averages are either steep on losses or a rollercoaster ytd. What can I do differently? Buying bonds is not for me, I reckon some people are making a killing with the bears? I cashed out early, now I have less than a 200k to get into the markets with. Any ideas?
Don't be in a hurry to get back in. The market needs several days of strong performance to signal that the downturn might be over; It's a time to be largely, if not entirely, in cash
Oligarchs with businesses in America should be taxed heavy, the economy is going to slow down and the markets with it. Work on your own terms and take advantage of the market anyhow you can
Its unclear which stocks and sectors will lead the market in the next uptrend. Stay away from the stock market if you do not have guidance from a plannner and investment strategist. My finances have been in order since I got a wealth planner like Monica with a 600 M AUM working for me.
why would you not sell a cash secured put first to acquire the shares? so you would get a premium and the shares ( if you wanted the shares) then do the covered call only if you are assigned?
If your intention is to buy the ETF, you could do that. However, this is a "trade" and there is a bit of a different mentality behind it. Although it is long term, you are "betting" on an upward trend over an 8 month period and to use up less capital on that bet, you go into the synthetic covered call program. With that, you wouldn't need the large margin required for the cash covered puts or the stocks for the covered calls and thus, can make other trades with the available margin and hopefully making gains with those trades too.
When stock goes our direction and we make $$$, we are all happy. But how about the other way, say SPY drops from $395 to $320? How and when do we exit to cut at least some losses?
There's no risk-free strategy with good ROI, but You would have fewer losses because of the premium than if you had just held the share. If the S&P fell 70 points, you would also have good opportunities because of the increased IV.
You don't want the leap to expire worthless. You want it to go up in value. If it expires worthless (the stock has gone below its strike price), the strategy is failing you badly.
So what happens if you end up having to sell the shares at expiration and don't own them? Would have liked to have heard the worst case scenario as well.
You will have to buy shares at the market price in order to satisfy your obligation Or, if you bought a call option, ITM, then you can take someone else's shares at an agreed upon price in order to cover someone calling shares away from you.
Well if you are selling a call at $450 that means you are obligated to sell 100 shares at that price so $45,000. When you buy a call at $310 you pay a premium to have the right to buy 100 shares at the price $31,000. So your total cost if you exercised the call would be $31,000 + premium ($10,300) = $41,300. So if your $450 call is assigned you make a profit of $45,000 + Credit($5.00) = $45,500 then subtract your starting cost $45,500 - $41,300. So you total profit from the 450 call be assigned and the 310 being exercised is $4200. Meaning that for this to work you must sell a call that will sell for more that the cost of the call you buy plus its premium. So lets say you sold a 400 call and get a $5.00 credit that will net you $40,500 when you are assigned meaning you take a loss of $800 dollars.
In this video the the covered call options sold all expired below the strike price . You did not explain what happens if one of the covered calls sold expired with a share price above the strike price . In this case you are obliged to sell your shares to the covered call buyer . Does the 310 deep in the money call option automatically get exercised in this case purchasing the shares at the 310 strike price and then they are automatically sold at the strike price to the covered call option buyer at the strike price ? Is this how this works ?
Potentially yes, you manage that by closing the short call or rolling the long call back to the current expiration so you can pull out the time value you still have.
excellent explanation of thisstrategy but I have a question. I have a margin account with interactive broker and they allowed me to buy share with only 25% of the total amount as a garanted. In this case which strategy is more convenience syntetic or traditional cover call. I think its a different with the delta buying stocks the delta iqual 1 regardless of the 25% of the total operation.
Wonderful video. Thank you. Had I know this before I wouldn't have suffered as much pain as I did when my recently purchased 100 shares of nvidia went down in price. I had had a covered call on them I would have made some extra cash while NVIDIA went down after the earnings call. By the way, I have a question, in my case I plan to hold to the nvidia shares for long term. Can I sell the covered calls only when they're going to expire any time into the future? I'm asking you this because I intent to keep my shares long term, so I'd like to benefit from the time decay and the volatility of the out of the money calls. Thank you!
hey buddy, I have been trading since the mid 90's, full time retail trader since early 2022 (after I sold all of my rentals at what I thought was a market top). I have my own Portfolio margin account and am currently making 128.39% per year (profit divided by average daily Portfolio Margin held). I mainly trade naked premiums with downside hedges and with most all of my money in T Bill since premium sellers don't need to spend capital to enter trades. How can your company boost me to the next level? Right now I maybe spend in about 1.5 to 2 hours of the 6.5 market hours trading, looking for trades, and doing paperwork. This 23 minute video is not counted in the time that I calculate in the 1.5 to 2 hours. Can your company get me to 250%+ per year with the same risk and same time involvement per day?
If in the case of the synthetic covered call, the May call gets exercised (presuming the stock closes above the 425 strike price), you'd still have to buy your shares of the long January call for 310 (aka $31,000) so that you could fill the order on the 425 call right?
I have a 2/16 $800 CC on RXRX one week to exp. With one week to go it is now worth $400. I have no intentions of giving that up unless the call shrinks. I may be exercised for a C gain.
Should talk about max loss including decay of Time Value of the LEAP and how it is leveraged to a drop in stock price. What if the stock price closes in the money?
If the shares fall sharply your LEAP options will expire worthless. At least if you own the shares you still have something of value that can come back. Time is not on your side with LEAPS.
Ya know i would buy a leap put also, that protects downsides and of course sell puts...and when market crashes you not only dont lose but IV explosion makes them more valuable....thoughts???
Could you also explain the scenario on the synthetic CC - LEAP option if the Covered Call closes or is going to Close "In the money". Please add an explanation of what the exit options would be for that scenario. - Thank you!
you have 3 option: 1 realized your profit by close out two legs 2. if you think the underly will continue to go higher, buy back the short strike, and sell out of the money call for another month. 3. if you think the underly will reverse after the expiration, buy back the short strike, and sell in the money call at where your strike was at for another month out to protect the price from dropping.
More risk equals higher reward, I like the conventional because I own the shares and don’t need to buy a call to cover a potential exercise of a sold call.
When you short a call, the broker will require that you 1) have been approved for naked call/put selling 2) have sufficient funds to more than cover the obligation created by shorting the call taking in consideration the days to expiration (rate of decay), and volatility of the underlying. In lieu of either of those, you have to have the shares (chocolate vanilla covered call). Implied by the video is that you don't have enough cash and buying power to purchase $45,000.00 worth of SPY and with a small account the broker is going to let you enter into a transaction whose potential loss is theoretically infinite. That's simply not going to happen.
The risk for the synthetic covered call is actually very simple. You risk losing only the capital deployed to long the deep ITM leap call. If the deep ITM leap call is worthless or depreciates in value, then the short call is also worthless (good for the seller, you).
If you look at the Delta at the time he is showing you the 7.5% you will see there is about a 25% chance for the price to get there. You don't want the price to get there so you have a 75% chance of success. He is just picking an amount that he is comfortable risking
What happens if the price goes above the covered call strike price with a synthetic call option? I wouldn't have owned the shares. Should I roll the covered call up and out to avoid assignment? Or, will this somehow automatically close itself out without me having to purchase "actual" shares? Thanks.
I guess last year your short calls would have been blasted through by the market, so what do you do? Roll up the LEAP to a higher strike at a profit, and eat the cost of rolling up the short call?
What delta do you recommend for deep in the money calls? Also, if my account is now spent $10k on the DITM call, the brokerage will let you sell calls with no cash in your account?
To reiterate some of the comments below, there is a massive omission in this video, You need to know what to do if SPY falls by 10% or more, which it can do in a 4 month span. You need to know how to manage the trade when it goes against you, before you enter the trade. You need to know when to get out of the trade before losses become painfully large. This video only covers the best case scenario, which is misleading.
Agree. I am not a trader but would like to learn how to execute option trades. My first rule in anything is how to analyze the risk or how to understand the worst-case scenario. Many presenters talk and rave about the "successful strategies" without delving into how and when to exit or at least this is what I seem to be getting.
@@dc-wp8oc I think they know but don't want to have people click off due to risk aversion and high capital requirements. Notice money needed and risk are put at the end no somewhere close to the beginning.
As far as I’m aware, and I maybe missing something so please explain, but this concept of a “synthetic covered call“ is not making sense. How are you covered since you actually don’t own any stock? If the call you are selling were to be exercised, you would be obligated to buy 100 shares of SPY (since you don’t own the shares to complete the call transaction) for a substantial amount of money that you do not have… why aren’t any of the downside risks discussed in this strategy? For new traders, who are unaware of the risks, this seems like a recipe for life-changing disaster.
Only works if you're certain the stock will stay roughly the same. If you think it's due for a rise then you might be better off not doing the short part of the trade.
Not true. You have to be short the actual underlying stock or ETF to be responsible for the dividend. Unless your short call is in the money, or close enough to make early exercise financially beneficial to the long holder, holding the short call is not an issue.
While this is very much correct in its example, had you don’t this in 2022 you would (probably) lost 50% of the account…. What is not covered is how this works in a down or even flat market. That 310 call will go to zero in a year…. Should cover the market analysis first.
Honestly I still don't understand the reason why my trader (Caitlyn Natasha Hughes) charges me 20% of my profit after the end of my weekly trade. I've been negotiating with her for about 15 months, but she keeps taking a percentage from me, which is very sad. I wish I could get a better trader who won't charge me a dime.
you mean you have a professional trader who trade's for you and makes profit for you. and you pay her 20% and you take the remaining after every trade?
20% is the standard rate. Usually they also charge an additional 2% on total principal. So, if she's not charging that, you kind of are getting a deal.
I would go ATM synthetic, sell the Put now you don't have the decay issue and you will even get a credit plus lower margin. What your doing in a bullish calender/vertical call spread, not a synthetic. I can teach you guys how to do options like a pro...
A calendar has same strikes and different expiration. a vertical call spread has same expiration but different strikes. Synthetic cover call (poor man covered call) with long call expires a year or more can be called a LEAP diagonal.
He didnt cover what happens when the trade goes against you. Covered Calls are not good when you have to exercise the long position in order to meet the short being in the money.
Dude wtf are you on about. Net of premiums of sold calls is a positive cash flow, not a zero or minus 38 K,, lol. Seriously, have someone work through these slides. And,, of course you are showing a perfect bull market example and speak of no risks,,,
this is a poor mans covered call... it is highly risky... as there are unrecoverable losses at risks if the share nosedives from the get go... there will be no way to rescue the trade or wait out... sunk costs embedded within design... contrast with the traditional covered call, the holder of the shares can wait out for a full recovery above costs price to continue selling calls ... this is the difference...
I am confused with one thing here. You mentioned buying a DEEP in the money call at 310 strike but that seem more like an at the money strike at 310 based on what I know about options. Can someone please explain?