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So on the website, if you go to t and then you go to strategies, you can see the covered call and momentum trading strategy right here. Momentum Swing Trading Okay, now that Ive talked about the options side of the covered calls, basically what they are, let me go into some of the details about the momentum plus covered call options algorithm. So this shows the break down of every trade in the back testing. A buy-and-hold strategy might lead to higher profits than a covered call strategy if the same stock purchased in both cases were to soar higher after entering the covered call, but over time the premiums from selling call. Looking at the May 25 strike, which is in-the-money.60 ( intrinsic value we see that there is some decent time premium available for selling. And in the time period after that, yet another 1 could be captured when selling a further call option. And if youve been trading the market this year, then you probably know that February the market sold off for part of the month but then went higher. So Im just showing you this so you can see that as you get more out of the money, on the put side, the price of the option goes lower.
Trading, strategy, guides welcomes you. And then the one sold on the following Monday at 2165, also should have been profitable. Best Covered Call Brokers Most brokerage firms that cater to options trading strategies support covered call strategies, and three of the best options trading platforms are tastyworks and thinkorswim. Were not here to tell you that there is no risk involved in covered call trading strategies. So at the time this picture was generated, the S P was trading at 2199, so roughly 2200. So theres basically two different kinds of options. And as I mentioned before, it performs really well covered call trading strategy in up and sideways moving markets. So even though the gain was 278 for August, we considered that really good, considering this is our long algorithm. Although covered calls are among the most powerful and simple of stock and options trading strategies, they are not without risk if applied incorrectly. So that we can talk about the covered call side of this algorithm, along with the momentum trades. So the profit would be 250, what the option is worth at expiration, minus what they paid for it, 122 or basically 127. Our total cost for constructing this option spread is 1,150. And thats because in these sideways conditions, this algorithm will trade more.
And youll see a big loss here in April on this algorithm. It does okay covered call trading strategy in sideways. And define kind of what the up sideways and down conditions are. And this more recent one we sold, was at a 2205 strike price. They ask what if questions.
In this hypothetical covered call covered call trading strategy example, the average premium is 1 per share or 100 for 100 shares. In November the market rallied. So now Id like to look at another month where the S P traded higher and that was in July of 2016. Video Transcript In this video Im going to be talking about the Momentum and. So it has to go above the premium we collect for it to actually be a loss. The calls would have been profitable here. Contrast holding a stock as part of a buy-and-hold strategy with selling call options against stock you own. And they would be long one 2205 call option. To better understand covered call writing, lets take a look at the three words included in the strategy : Covered means we first buy the stock before we sell the option. While there is less potential profit with this approach compared to the example of a traditional out-of-the-money call write given above, an in-the-money call write does offer a near delta neutral, pure time premium collection approach due.
So the loss was more than four points. Heres an example of covered call trading strategy a down moving market. So the little yellow line here, shows where the strike price was for the call that we sold. Because its a pretty good example that shows kind of what I mean. We then receive an additional 500 profit from the sale of the stock. Option premiums were higher than normal due to uncertainty surrounding legal issues and a recent earnings announcement. Perhaps that doesnt seem too attractive at first glance, but over time the benefits of lowering risk regularly by selling call options against a stock holding are obvious.
And so, because its a tool, it kind of adds an extra layer of uncertainty on the back testing side. Yes, so this last one ended up getting stopped out on the second of August. Thank you for reading! Just keep in mind that most of the data that we show is based on back testing, which has limitations. Because it shows what value the covered calls add. We can begin by looking at the prices of May call options for rmbs, which were taken after the close of trading on April 21, 2006. However, usually when the momentum algorithm triggers, it will kind of trigger every day for a certain amount of time.
That was also, probably a gain. Which is where that gain comes from. In exchange for selling a call option at strike 50 and agreeing to sell your stock at that price, you get paid a call option premium. When found, an in-the-money covered - call write provides an excellent, delta neutral, time premium collection approach - one that offers greater downside protection and, therefore, wider potential profit zone, than the traditional at- or out-of-the-money covered writes. If theyre wrong, they get stopped out like we did here. Why Doesnt Every Stock Trader Sell Covered Calls? Is because we dont, were not trying to create the Holy Grail with one algorithm covered call trading strategy where it does good in all market conditions. At least it doesnt lose. So I believe we took a small loss on this trade. Because on this covered call, it looks like we sold the call on Monday. So the big uncertainty though is the premium. A trading secret that we have been using, is to buy stock options with an expiration date longer than one year also known as leaps (Long-Term Equity Anticipation Securities). But because we collected about four 1/2 points of premium on this call that we sold, and the options expired at, basically about five points above the strike, this covered call trade was actually break even.
I think that summarizes everything. You can pause the video and read it more carefully. In the money options mean the call option is below the stock price because a call contract gives you the right to buy at a certain strike price. So this would be Tuesday, Wednesday, Thursday, Friday, so on Friday it expired just barely above the call. I believe that one took a loss, but lets take a look. But the market rallied quite a bit. And then the more in the money the put is, the more expensive the option. For example, if you bought 100 shares of stock at a price of 45 per share and sold 2 call contracts at strike 50, then for each call contract you sold, you are obligated to sell. The simplest way to understand how the covered call strategy lowers cost basis and risk is to compare the risk of holding a covered call position with the risk of holding only stock. Which equates to 250. And thats, thats helpful to show, I think. And then the options expired worthless on Monday the 26th.