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Coveredcall

Producing Recurring Income in GoldGold has long been a darling of investors. Its holders - whether households or central banks - seek refuge in the yellow metal in times of crisis. Gold is a resilient store of wealth, offers durable portfolio diversification, exhibits lower volatility relative to equities & bonds, and serves as an inflation hedge. But it has a big downside. As mentioned in our previous paper , gold pays zero yield. Shares pay-out dividends. Debt earns interest. Property delivers rents. But gold? Zero! There are multiple methods of generating yield from gold. This paper illustrates a risk-limited, easy to execute, and capital-efficient means of producing yield by investing in gold. Innovation in financial markets enables even non-yielding assets such as gold to produce regular income. A class of derivatives known as call options can be cleverly deployed to generate yield. Call options are derivative contracts that allow its buyers to profit from rising prices of the underlying asset. When prices rise, call option holders earn outsized gains relative to the options price ("call premiums"). Unlimited upside with limited downside describes the call option holder's strategy in summary. What has that got to do with generating yield in gold? Everything. For every buyer, the market requires a seller. Options sellers collect call premiums which comprise the income. Many widely believe that options are weapons of mass wealth destruction. Not entirely wrong. Used poorly, options devastate investors' portfolios. Deployed wisely, options help astute traders to better manage their portfolio, generate superior yield on their assets, and construct convexity (disproportionate gain for fixed amount of pain) into their investing strategies. Fortunately, a covered call is a strategy which uses options prudently. As the strategy involves holding the asset whose prices are expected to rally, the risk of the strategy is hedged with risks well contained. Gold Covered Call involves two trades. A long position in gold and a short position in out-of-the-money gold calls. In bullish markets, investors gain from call premiums plus also benefit from increase in prices. Covered calls not only enable investors to generate income but also reduce downside risk if asset prices tank. A covered call trade in gold can be implemented in a margin efficient manner using CME’s Gold Futures and Options. A long position in CME’s Gold futures (“Gold Futures”) gives exposure to 100 troy ounces (oz) of gold per lot. Combining long futures with a short call option on Gold Futures at out-of-the-money strike allows investors to harvest premiums. Selecting an optimal strike and an expiry date is critical to successfully execute covered call strategies. First, Strike. It is the price level at which the call option transforms to be in-the-money. Strikes which have daily volumes & meaningful open interest enable options to be traded with ease and provide narrow spreads. Strikes that make options expire worthless benefits the covered call options holder. Second, Expiry. Options have expiry. Options sellers thrive on shrinking expiry for generating yields. Investors selling call options optimise their risk-return profile by selecting an expiry with higher implied volatility (IV). Option prices are directly proportional to IV. Higher IV leads to larger premiums enriching returns. SIMULATION AND PAY-OFF MATRIX This paper illustrates a covered call strategy in gold using the CME Gold derivatives market: 1. Long one lot of Gold Futures expiring in Oct (GCV3) at $ 2,050/oz. 2. Sell one lot of Call Options on Gold Futures expiring in Oct at a strike of $ 2,275 collecting a premium of $ 40/oz. The pay-off matrix simulates the trade P&L under four likely outcomes among many possibilities at trade expiry: a. Gold rises past the strike ($ 2,400): Options get assigned to the buyer. Covered call option holder incurs loss of $ 85/oz (=$ 2,400 - $ 2,275 - $ 40) from short call offset by profits from long futures ($ 350 - $ 85) = $ 265/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 265 x 100 = $ 26,500. b. Gold rises but remains below the strike ($ 2,250): Options expire worthless to the buyer. Seller retains premium in full. Covered call option holder profits from long futures + call options premium ($ 200 + $ 40) = $ 240/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 240 x 100 = $ 24,000. c. Gold price falls marginally below the entry price ($ 2,030): Options expire worthless to the buyer. Covered call option holder loses money from long futures and thankfully the loss is offset by call options premium (-$ 20 + $ 40) = $ 20/oz. Each GC contract has 100 troy ounces of gold, so total profit will be $ 20 x 100 = $ 2,000. d. Gold price falls ~5% below the entry price ($ 1,950): Options expire worthless to the buyer. Covered call option holder loses money from long futures and the loss is partially offset by call options premium (-$ 100 + $ 40) = -$ 60/oz . Each GC contract has 100 troy ounces of gold, so total loss will be -$ 60 x 100 = -$ 6,000. The chart below describes the pay-off from Gold Futures (Long position), Gold Call Options (short position) and Covered Call (combination of the two trade legs). MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:GCV2023Education
by mintdotfinance
3
Tutorial: How SMAC can help find the Ideal Covered Call StrikeQ3 Earning season is approaching fast Background: The earnings covered call volatility play ------------------------------------------------------------------ one of the easy earning plays if you hold a portfolio of stocks (or if you're a fan of the wheeling strategy) is to sell Covered Call (CC) right before the earnings announcement - when the volatility is inflated and the premium price peaks - usually using weekly options - which then you can close immediately after the earnings have been announced, or just leave them to expire worthless if they end up out of the money (OTM). When this play is done right, and depending on your position size, it can deliver few hundred (if not thousand) bucks literally overnight. When we design this play, we need to consider also the scenario that with the earnings announcement, the stock price may shoot over our selected strike, and we may end up getting assigned - and the stock is called away from us. However, with the proper "design" of this trade play, you can set it up for a "no-lose" trade scenario - if you don't get assigned, you keep all the call premium (not bad for a 2-day trade) - see example below - you still keep the stock. - if you get assigned, you will earn the difference between the strike price and your breakeven *plus* the covered call premium -- so a winning trade in both scenarios. if we can repeat this play for few stocks during earnings, the gain can accumulate and bring in a very "good month" for the trader who can master this play. Using the SMAC to make this scenario easier ----------------------------------------------------- One of the reasons i wrote the "Auto-stepping, Zero-lag Moving Average Channel - SMAC" script is to help me with trade scenarios like this. Let me share how. - Assume i hold 1,000 AAPL shares in my portfolio. - i just bought them couple of weeks ago - and i am planning to play the volatility and sell Covered Call into the upcoming earnings using the weekly options. - my goal is either to collect the call premium and keep holding AAPL past the earnings - or to get assigned and sell the stock and realize a profit larger than what i would have got if i just bought then sold the stock direct - my preferred strike "distance" is 5% Out of the Money (OTM) - which can give a reasonable value of premium while giving me room to still keep the stock if the price doesn't shoot that high due to the earnings. - I plot my breakeven price on the chart - say for the example here, it's $143 - Add the SMAC to the chart and set the SMAC Percent Envelop to 5% - This will immediately show what price range i should pick the Covered Call strike if i want a 5% OTM -- it's the $151 or the $152. Maybe i would pick the $152, cause if i get assigned, it would give me a larger gain on the underlying position. Calculating the P&L for both CC scenarios is also easy now on the chart --------------------------------------------------------------------------------------- - Not Assigned: after the earnings, the stock still closes below our strike - we can even leave the call to expire worthless - no commission paid - i keep the premium assume the CC premium is $1.3 by the time i sell the CC & assume i have 1,000 AAPL shares, that's $1,300 over-night! = 1% return and i still keep the stock - We get assigned with the same assumptions above, we keep $152 - $143 = $9 + the premium ( = $10 bucks per share -- that's $10,000 in 2 weeks. around 7% return) - we can buy AAPL again later on a dip. *** Big Note here --------------------- Another scenario is, if my breakeven for AAPL is above the 5% strike price level, in which case, i would not consider this trade at all - because if i sell the CC and i get assigned, i would basically close my position at a loss - again, once i set the SMAC and my BE of the chart, i can easily see if that's the case and make a fast trade decision - here's how this would look on the chart if you hold 1 or 2 positions in your portfolio - this whole SMAC / Chart thing may not be worth it - maybe a quick mental calculation or simple spreadsheet is easier :) - but if you hold 15-20 positions in your portfolio / multiple accounts, doing this fast during the earnings days and visually on a chart can save a good amount of time and give more confidence. i hope this can inspire some fellow traders to share how else they can use the Auto-stepping zero-lag Moving Average Channel Please do not treat this post as a trade recommendation - or as trading education - i'm just sharing thoughts and some of my limited experience - Please trade safely.
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NASDAQ:AAPLEducation
by RedKTrader
18
Covered Calls For BeginnersI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Covered Call For Beginners For good reason, the covered call strategy is one of the first option strategies that new traders start trading. This is an effective strategy that options traders often use to provide income on stocks they already own. Questions to be considered in this article: - What Is A Covered Call? - Should You Trade It? - Specific Example Can You Do It In A Retirement Account, EG, IRA? What Is A Covered Call? A covered call is an options strategy used traders to produce income on stocks on long stocks held in their portfolio. This strategy is used by traders who believe that stock prices are unlikely to rise in the short term. A covered call strategy is defined as holding a long position in stock while simultaneously selling a call option on that same asset. This strategy can provide income to a trader who is long term bullish on stocks but doesn’t believe there will be a significant increase in price immediately. A covered call will limit a trader’s potential upside profit if there is a significant move in the price of the stock upwards. This strategy provides little to no protection if the asset price moves downwards. Covered Call Example For the specific example that we’re going to cover today, we’ll take a look at JP Morgan JPM . The price information reflects the price of JPM back in July at the original time of writing for this guide but is just being used as an example If you were holding JPM stock in your portfolio before the pandemic, chances are that you are currently underwater. DISCLAIMER ***For the purpose of full transparency, I do not own or hold any JPM stocks*** I typically only hold stocks between 5 and 25 days. Stock Price Movement Recap For this example, we’re going to assume that I own 100 shares of JPM . If I were to purchase 100 shares for $96 it would mean that the capital requirement for this position is $9600. You’re probably familiar with the way profits move in relation to stock prices… but just to be safe: - If the stock increased to $106, or $10, I would earn $1000. - If the stock increased to $116, or $20, I would earn $2000. - If the stock decreased to $86, or -$10, I would lose $-1000. How Does A Covered Call Work? Sell one call option contract for every 100 shares of the underlying stock in your portfolio. The contract selected would ideally have a short expiration date of 7 days. You would choose an “out of the money” call at a higher strike than the current price of the stock. When choosing this strike price, you would typically choose a price at least one standard deviation away from the current strike price. In other words, choosing a strike price that you do not believe the current strike price will exceed before the date of expiration. If you’d like to learn more about this options strategy, or options in general, I have an awesome Options 101 Course. What’s the benefit of having a Covered Call for the stocks in my portfolio? It’s simple really. When you sell a call option contract, you will receive a premium. This strategy generates income when you don’t expect to profit from the movement of the underlying stock price. In this example with JPM , I received a premium of $55 for selling a call option contract at the price of $116. Provided that the underlying strike price does not move above $116, the contract will expire worthlessly and I will keep the premium I collected by selling the options contract. Let’s take a look at how a covered call will affect your portfolio with the same stock movements. - If the stock increased to $106, or moves $10, I would earn $1000 plus the $55 - If the stock increased to $116, or moves $20, I would earn $2000 plus the 55 - If the stock decreased to $86, or moves -$10, I would lose $-1000 but keep the $55 for a total loss of -$945 Why does this work? If you take the entire amount of premium you received and divide it by the number of days between no and contract expiration, you come up with a number like this: $55 dollars in 7 = $8(ish) per day. This covered call contract is paying us $8 dollars per day. If you take the $8 dollars, divide that by your total capital investment of $9,600 it equals 0.08%. This may not sound too incredible, but… If we do some basic arithmetic and take 0.08% and multiply that by 360 trading days per year, you end up with a return of over 30%. This is in addition to what you earned from the growth of the stock. On some stocks, it’s possible to earn upwards of $20 per day. This could increase annual returns in excess of 40% to 50% Does this sound a little more exciting? YES! Should you trade it? ABSOLUTELY! BUT…. There is a risk associated with this strategy. If there is a large movement of the underlying stock price that surpasses the strike price of your call option contract, you will be forced to sell your shares at this price. This would limit your upside potential to the difference between the current stock price and the price of the call option contract. Example: If the price of the stock went up to $117 (past the $116 call option) and the options contract expires, your stocks will be sold $117. This means you would earn $1,100 + $55, or $1,155. In other words, you would lose $100 for every $1 the strike priced moved above your call option contract. The silver lining is that you can probably buy your stock back the next day if you wanted to hold them long term. This type of trade can be taken inside of your retirement account such as an IRA, which provides you with another way to grow your account conservatively.
NYSE:JPMEducation
by rockwelltrading
TUTORIAL: COVERED CALL STRIKE IMPROVEMENT VIA ROLL AND FINANCINGOne of the primary reasons people poo-pah covered calls is because they cap out max profit. There are two things these naysayers overlook and they are (a) you can roll out your short call for duration and credit, thereby decreasing your cost basis and increasing your potential max profit; and (b) you can always "finance" short call strike improvement, albeit at the cost and risk of doing an additive adjustment trade in the event that you can't improve the strike satisfactorily. Pictured here is a deep in-the-money SPY December 18th 255 covered call. If I do absolutely nothing, my SPY long shares are going to be called away, if not at expiry, then earlier by someone exercising their long calls. Say, however, I want to stay in the stock, as well as improve my cost basis and the short call strike such that my max profit potential is increased by the amount of strike improvement. As previously mentioned, there are a couple of ways to do this. The first is to look at merely rolling the short call out in time and examining whether the strike can be improved while still getting a credit. One thing you'll immediately notice when you do this with the December 255's is that the strikes are five wides so that if any improvement is going to be made, it will have to be from the 255's to the 260's or higher. With the December 18th 255's going for 50.85 at the mid, I'll have to look at 260's in an expiry in which they pay more than 50.85 to get a credit on the roll, and the first expiry in which that occurs is in January of 2022 where the 260 is paying 51.00 at the mid price. In other words, I'd have to roll the calls out a whole year to improve them by five strikes, all for a measly .15 ($15) credit. That being said, I also increase my max profit potential by the width of the improvement (5.00) plus the credit received (.15) or for a total of 5.15, so that is not entirely a bad thing were I to do that. It is also the most straightforward way to improve your short call strike without adding risk or tying up additional buying power. If, however, I'm not big on rolling out that far out in time, I can also looking at financing the strike improvement via an additive trade for which I receive a credit that exceeds the cost of the strike improvement, with the down side being that any additive trade has its own buying power effect and side risk. Here are a couple of examples: Roll the December 18th 255 up to the December 18th 265 for a 7.40 debit and sell the December 18th 240 put for a 7.64 credit. I improve the short call strike by 10.00 and receive a net credit of .24 (7.64 - 7.40). Net delta of the position increases from 20.99 to 42.18. Roll the December 18th 255 up to the December 18th 269 for 10.37 and sell the December 18th 240/343 short strangle for 10.44. Here, I improve the short call strike by 14.00, and receive a .07 credit to do it. The net delta of the position increases more modestly from 20.99 to 28.02 because the short strangle is delta neutral, with all of the net delta pickup coming from the roll of the short call.
AMEX:SPYEducation
by NaughtyPines
5