Part 2 Tutorial | Covered call strategy as an option seller! Time is money! 🕒💸
Hey Mooers,
Hope you have a good trading day. I I did and it manage to reap a lot of rewards. 💰💰 💰
In today's lesson, I'm going to share why time is money! and why is literally the most useful strategies you can make as an option seller!
Disclaimer! ⚠ : The is my opinions it is not an intent of a recommendation to buy or sell of a stock. All information here is for education purpose only. Please do your own Due diligence and be a responsible trader! Let's go! 🚀
So when can you use this strategy?
I'd say if you are going for a covered call strategy. This may work if you are long over this company or if the company is going sideways and you find it relatively bullish.
This may work as a Cash Secured put strategy too which I may try to experiment on it next.
In the last series of I'm a horrible buyer, this is what I had learnt.
Aaron Invests (AI) :Admit defeat. 😞 I am a terrible options buyer! Here is some lesson learnt!
More details in the article.
Admit defeat. 😞 I am a terrible options buyer! Here is some lesson learnt!
Admit defeat. 😞 I am a terrible options buyer! Here is some lesson learnt!
I learnt that time 🕒 decay exponentially! The nearer the clock goes to 0 dte (date to expiry) the faster the θ time value decreases! Especially if is an OTM call or put options! 📃
Now from that lesson how could I Use to my advantage?
The longer the time frame, the slower the decay. Hence rolling the options. 🍥
What is rolling?
Article below
Aaron Invests (AI) :Rolling the Dough! 🤑🤑💵💵 Tutorial | What is a roll?
Rolling the Dough! 🤑🤑💵💵 Tutorial | What is a roll?
Rolling the Dough! 🤑🤑💵💵 Tutorial | What is a roll?
When to roll? you may read more details above. The jist of it is you must have at least a credit return roll to reduce the cost basis.
2 ✌️ factors to consider when doing a roll in priority of that order. 🍥
1. Implied Voilatility 📈📉
Implied Voilatility indicates that the market has higher price change that will either go uptrend or down trend. It doesn't mean that it is bullish or bearish.
It is probably due to a certain macro economics or a certain individual event that makes the demand for the options.
Example: with the election rolling there is a higher IV that is happening on the NOV 15 at $Trump Media & Technology (DJT.US)$
The higher the IV, the more favourable it is to start rolling to collect the premium first.
2. Time 🕒
The shorter the time frame, the lower the premium. The longer the time frame the higher the premium
Same DJT we could see here that the premium is lower compared to the Lower IV and the lower time frame.
When should I execute this strategy?
1. When you messed up your options selling as your option had gone In-the-money (ITM) .
Remember as the Seller of options. Your goal is to be out-the-money (OTM) . What you would do is to trade out by buying back ITM call options and sell OTM call options that is in a longer time frame. Essentially your are trading to prevent execution and believe it will strike out on a later date. In other words "keeping the dream alive" .
Example: market price is at $15.50 and your 0DTE options is at $15. Current value is at $1 you buyback the options . What you will do now is to find a later date OTM say 14DTE at 16 with a value of $2 you sell the options. In other words you get $100 credits and wait for it to expire. Remember when trading out you are buying back at $1 and sell short for $2. You wanted to get near to the same value of premium or higher. This is to reduce the risk from it being called. And you are hoping that the price will strike OTM and collect the premium in full!
2. When you see a Higher IV in a later date believing it will never reached that strike price in the future. In other words, same strike price higher premiums.
Example: 0DTE is valued at 15 strike price premium at $1 with a low IV. 14DTE at 15 strike priced at $3 due to high IV and time. You think the price will never reach there and just place the covered call higher and collect the premium first. And lower your cost basis of shares.
You are taking a higher risk essentially on a later date.
Now when not to do this?
1. The obvious answer is when your covered call is OTM at 0DTE and no execution needed.
2. When the later time fame gives you a debit position. That is because you are increasing your risk on a later date and is not worth it. You are better off letting it expired and let the trade be executed.
Case to case basis. If you believe that it will be better then is your choice.
Hope this helps broaden your perspectives on options strategies.
All the best and may your trades be ever in your favour. 🥂
Pictures for attention
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment