The first strategy for options newbies, to use Covered Call to shave off US stocks

Investors often hear wealth stories about getting rich overnight, but unfortunately, the vast majority of retail investors won't be the protagonists of the story. For most of us retail investors, instead of thinking about making a fortune, it's better to get down to earth by running and getting fit.

The covered call I'm going to introduce to you today is a basic strategy similar to swimming and fitness. It doesn't make you rich overnight, but if used well, it can increase the yield of your long-term holdings by an additional 10%-20% every year. Everyone knows what level this long-term rate of return is.

A covered call means we sell 1 call option for that stock while holding 100 underlying shares (in US stock options, 1 option contract usually corresponds to 100 underlying shares).

It is important to note here that the premise for every sale of a call is that you must hold 100 shares of the original stock, also known as “covered (covered)”, that is, “ready to be exchanged and taken away at any time” (if the call to be sold becomes real value when it expires, the other party will exercise its right to take your shares).

The most important part of this strategy is this covered. Assuming you don't own the original stock, it's called naked selling. Selling naked is an extremely risky operation. If you are a novice, don't try it out at will. (Limited profit, unlimited loss)

Covered calls can generate a steady stream of income when you hold stocks. This income won't be much, but it's relatively stable (if the stock you hold is not a monster stock fluctuates drastically), which is equivalent to gradually reducing the cost of holding a position for you. Compared to doing T, the cost reduction is not that fast, but it is a kind of “don't do it for nothing” operation.

The covered call strategy is very newbie-friendly and easy to operate:

Open positions greater than 100 shares, preferably an integer multiple of 100

Choose a false call to sell. You can sell 1 call for every 100 shares of original stock held. Just choose the price you want to sell the stock at the exercise price

Wait until it expires and sell again

Here are a few things to keep in mind:

You can't oversell. For example, if you hold 150 shares, but you sell two calls, in fact, one call is naked. If the stock price rises above the exercise price of Naked Call, it is equivalent to you shorting 100 stocks that are rising, which is very dangerous.

When choosing the exercise price, you must choose the price at which you are willing to sell the stock at this price, so once the stock price actually reaches this position, you can just let the other party take it. Don't be in the mentality of selling flights.

From the profit and loss chart, we can interpret the following values of this strategy:

Maximum profit: The exercise price of selling Call - the cost price of the underlying share + premium for the revenue from selling Call. The maximum profit is calculated by closing all positions (that is, the stock is also closed), so profit is the difference between the exercise price at the time of the strategic transaction and the stock price at the time (that is, the price difference income received by the stock itself after the stock price reaches the exercise price and the stock itself is sold as desired) plus the royalties from the sale of call income. Obviously, the maximum profit point occurs when the stock price reaches the exercise price.

Maximum loss: the cost of buying the original stock - the premium from the sale call. That is, in an extreme case, when the stock returns to zero, the overall profit from the position is only the premium received from the sale call.

The remaining question is how to choose the “exercise price”. Friends familiar with options may choose directly through the Greek alphabet. Well, for friends unfamiliar with the Greek alphabet and pricing model, the easiest way is to choose a price they are willing to pay.

Generally, covered calls are used when stocks rise moderately. If stocks fluctuate too much, stocks are easily called off, which is unacceptable for investors who want to hold them for a long time; if stocks fall, then the downside losses faced by underlying stocks far exceed the premium received by selling call options. At this time, we may need to adopt other rescue/insurance strategies.

You can also try using the Greek letter delta. We can roughly think of the delta value as the probability that an option becomes a real value when it expires. For example, a delta 0.2 option, then the probability of it becoming a real value after expiration is about 20%. Obviously, if you don't want the stock to be called away, then it's best to choose a call sale with a lower probability.

Covered calls are a great strategy for options newbies, because you can use the idea of a stock. The exercise price is your “take-profit line”. No matter what indicators you use to analyze or what underlying stock trading strategy you use, you can continue to sell calls at the take-profit position, reducing your shareholding costs by continuously collecting premium payments.

Holding an underlying stock indicates bullishness; selling a call indicates that it is not bullish. The direction of the transaction is completely opposite, how can I make money? The key point is that the selling call is not bullish within the specified price (exercise price) before the specified point in time (expiration date):

If the stock price on the maturity date is <exercise price, the buyer does not exercise the right, and the seller earns the equity. You can continue to hold underlying shares and operate CC strategies to earn more equity;

If the original stock price > exercise price on the maturity date, the seller: 1. Earns a profit from the original stock rising to the exercise price; 2. Earns equity; 3. If the number of losing options corresponds to the stock, the increase above the exercise price.

As an example, to better understand, let's say I hold BABA, and the closing price of the previous trading day was $80.48. If the price expires one week after 1 sale, the exercise price is $90, and the equity is $34. The expiration date is subject to the following two situations:

BABA's stock price did not exceed $90, and buyers did not exercise the right. Leaving aside the rise and fall of the original stock, it took 5 days to earn a premium of 34 US dollars, and the profit margin was 2.13%

BABA shares rose more than $90, for example to $95. If the buyer chose to exercise their rights, I had to sell $95 of BABA stock to the other party for $90. 1. Original shares rose from 80.48 to 90 US dollars, and every 100 shares can earn 952 US dollars; 2. Earn 34 US dollars in premium; 3. Earn 5 US dollars less profit*1 option 100 shares = 500 US dollars; the final profit and loss situation is: 952+34-500 = 486 US dollars

After reading the example, don't you want to do a covered call at all... Options sellers are indeed “limited profits, unlimited losses,” but don't forget another characteristic: options sellers are low in profit, but they have a high win rate! You can use the high win rate to earn stable income from frequent sales calls and make up for losses caused by a possible decline in the underlying stock. The covered call strategy essentially sacrifices some of the rising profits of underlying stocks in exchange for a greater win rate. The exercise price set at the time of the sale call actually sets a take-profit price for the underlying stock in disguise.

If the stock is taken away by exercise of power, please don't feel sad about selling it; instead, you should be happy, because you have completed an investment with the expected profit according to the plan! US stock options can be operated on many trading platforms, such as Yingtou, Jiaxin, Futu Securities, and BiyaPay, which recently launched US and Hong Kong stock options. Friends who want to try out options can put the knowledge they have learned into practice.