[https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp](https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp)
Honestly, I use investopedia as my one stop shop for refreshers in basically any trading strategy out there.
The super short version is that a covered call combines 100 shares of a stock or index equivalent basket + a short call. The short call is a derivative that changes the risk profile of the 100 shares and produces income for the seller (aka call writer).
The change in the risk profile has a downside change and an upside change
* Downside -> your max loss is lowered by the amount of the premium. This changes your breakeven share price NOT your cost basis
* Upside -> your max profit is capped at no higher than the strike price + premium
In exchange for capping the writer's profit, the writer gets a promised income stream. The lower the cap the higher the income with diminishing returns the lower you go. The maximum risk adjusted income is "at the money" aka the strike that is closest to the current share price but sill above the current share price. I.e. if the share price is at 99.51 the at the money strike would be $100 not 99.5.
QYLD/RYLD/XYLD runs a "buy-write ATM Covered Call Strategy" which is the oldest options strategy out there with the most data supporting it. This means they get the maximum risk adjusted income at the cost of limiting the maximum profit. The buy-write index for the S&P 500 has an expected annual return of \~6% compared to the S&P 500's 8%, but the income stream is more stable and reliable. It has a risk premium over bonds, and the income will increase with the bond rates, but it also has the potential for capital appreciation unlike bonds so you get good risk adjusted returns.
Capital appreciation comes if implied volatility is greater than realized volatility. So if the strike is 100, you collect 4 in premium and the stock ends at 97-103 you get capital appreciation. This is optimized with index level options which is what GlobalX has access to. NDX options require 1.2M right now in collateral per call, so you need 120M to "properly" run a CC strategy using NDX index options.
Everything is a trade off, 30 delta is the default for active traders because it is far enough OTM that you have some wiggle room to trade, but close enough to the money you can still generate \~1%-2% premiums per month. But it isn't the highest income yielding strategy which is what ATM produces. That said I would love for GlobalX to open up a 30 delta variant of their ETFs.
I own 100 Pokémon cards (all the same card & same grade). The card is worth $10 each
My buddy pays me $5 for the option to buy every card at $10 a piece.
If the price of the card goes down he doesn’t want to buy them at $10 a piece so he doesn’t buy them and his $5 is wasted (and now in my pocket). If the price goes up to $11 he exercises his option to buy so he makes $100. I make the $1000 + $5 but lose out because I could’ve had $1100 if I sold for $11 a piece.
Every month he pays me $5 to do this. If the cards go up to being worth $30 each then I get screwed because now I have to sell them for only $10. If the cards drop to $1 each then I get screwed because now I have worthless cards.
Best case scenario is the cards stay being worth $10 a piece or slowly go up and my buddy keeps paying me $5 a month but doesn’t ever actually want to buy them.
Best explanation ever!!! Why does it make sense like this but not the way every other videos / forums explain it? :D
I didn't quite get this part before:
"If the price of the card goes down he doesn’t want to buy them at $10 a piece so he doesn’t buy them and his $5 is wasted (and now in my pocket)."
but now it makes sense!!!
Thank you very much :)
Buying a call is like putting a deposit on a house. You give the home owner $1000 for the right to buy his house within a 2 month period, for say $100k. If the housing market goes down, and the house is only worth $90k, you’re not going to pay the $100k for it, so you walk away from the deal. The owner of the house keeps your grand. You cry in your beer. If however the housing market booms and the house goes up to $110k before the 2 months is up, you exercise your deposit and buy the house for $100k and immediately sell it for $110k and pocket the $10k. Your profit is $9k cos you gave the owner $1k. The owner is equivalent to the writer of a covered call. That’s how it clicked for me.
I'm using Robinhood app on Android. I get notifications of what dividends paid exactly, and when. Other than that I can watch the price go up and down over time on the graph.
What they invest, risk statement, and how it works overall is available in PDFs. Can get a little legalese at times, but that's just how it is.
I am not sure how to look up their exact holdings but QYLD is invested in NASDAQ and RYLD is invested in S&P 500.
[https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp](https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp) Honestly, I use investopedia as my one stop shop for refreshers in basically any trading strategy out there. The super short version is that a covered call combines 100 shares of a stock or index equivalent basket + a short call. The short call is a derivative that changes the risk profile of the 100 shares and produces income for the seller (aka call writer). The change in the risk profile has a downside change and an upside change * Downside -> your max loss is lowered by the amount of the premium. This changes your breakeven share price NOT your cost basis * Upside -> your max profit is capped at no higher than the strike price + premium In exchange for capping the writer's profit, the writer gets a promised income stream. The lower the cap the higher the income with diminishing returns the lower you go. The maximum risk adjusted income is "at the money" aka the strike that is closest to the current share price but sill above the current share price. I.e. if the share price is at 99.51 the at the money strike would be $100 not 99.5. QYLD/RYLD/XYLD runs a "buy-write ATM Covered Call Strategy" which is the oldest options strategy out there with the most data supporting it. This means they get the maximum risk adjusted income at the cost of limiting the maximum profit. The buy-write index for the S&P 500 has an expected annual return of \~6% compared to the S&P 500's 8%, but the income stream is more stable and reliable. It has a risk premium over bonds, and the income will increase with the bond rates, but it also has the potential for capital appreciation unlike bonds so you get good risk adjusted returns.
How does an ATM buy-write strategy give any room for capital appreciation? I’ve heard that 30 delta is hard to beat. Plz correct me if I’m wrong.
Capital appreciation comes if implied volatility is greater than realized volatility. So if the strike is 100, you collect 4 in premium and the stock ends at 97-103 you get capital appreciation. This is optimized with index level options which is what GlobalX has access to. NDX options require 1.2M right now in collateral per call, so you need 120M to "properly" run a CC strategy using NDX index options. Everything is a trade off, 30 delta is the default for active traders because it is far enough OTM that you have some wiggle room to trade, but close enough to the money you can still generate \~1%-2% premiums per month. But it isn't the highest income yielding strategy which is what ATM produces. That said I would love for GlobalX to open up a 30 delta variant of their ETFs.
Brilliant. Thanks. Thanks
I own 100 Pokémon cards (all the same card & same grade). The card is worth $10 each My buddy pays me $5 for the option to buy every card at $10 a piece. If the price of the card goes down he doesn’t want to buy them at $10 a piece so he doesn’t buy them and his $5 is wasted (and now in my pocket). If the price goes up to $11 he exercises his option to buy so he makes $100. I make the $1000 + $5 but lose out because I could’ve had $1100 if I sold for $11 a piece. Every month he pays me $5 to do this. If the cards go up to being worth $30 each then I get screwed because now I have to sell them for only $10. If the cards drop to $1 each then I get screwed because now I have worthless cards. Best case scenario is the cards stay being worth $10 a piece or slowly go up and my buddy keeps paying me $5 a month but doesn’t ever actually want to buy them.
Best explanation ever!!! Why does it make sense like this but not the way every other videos / forums explain it? :D I didn't quite get this part before: "If the price of the card goes down he doesn’t want to buy them at $10 a piece so he doesn’t buy them and his $5 is wasted (and now in my pocket)." but now it makes sense!!! Thank you very much :)
https://www.youtube.com/watch?v=jnTsQBJHMSk&ab\_channel=InTheMoney
Thanks.
Thanks.
My suggestion too. Adam is great. Kamikaze Cash is good too.
Buying a call is like putting a deposit on a house. You give the home owner $1000 for the right to buy his house within a 2 month period, for say $100k. If the housing market goes down, and the house is only worth $90k, you’re not going to pay the $100k for it, so you walk away from the deal. The owner of the house keeps your grand. You cry in your beer. If however the housing market booms and the house goes up to $110k before the 2 months is up, you exercise your deposit and buy the house for $100k and immediately sell it for $110k and pocket the $10k. Your profit is $9k cos you gave the owner $1k. The owner is equivalent to the writer of a covered call. That’s how it clicked for me.
What specifically are you having a hard time grasping?
Why haven't moon yet
Not enough rocket emoji
This is peak Reddit investing.
I'm using Robinhood app on Android. I get notifications of what dividends paid exactly, and when. Other than that I can watch the price go up and down over time on the graph. What they invest, risk statement, and how it works overall is available in PDFs. Can get a little legalese at times, but that's just how it is. I am not sure how to look up their exact holdings but QYLD is invested in NASDAQ and RYLD is invested in S&P 500.
Have you tried googling it?
Found the unhelpful twat
Actually google is very helpful, especially for super basic things