Talking Stocks 2.0

[Hard_Six]

Originally Posted by jpeezy14@hotmail.com

I'd be lying though if there wasn't a part of me during pre-market/open that was VERY concerned...

Same here. Very much so.

[7sins]

Options Training Part 2 with 7Sins: HOW TO GENERATE EASY CASH FLOW WITH YOUR STOCKS VIA COVERED CALLS


I know a lot of you have been asking for this on Covered Call strategies and it took me a bit longer to write but hopefully all of you find it helpful.

Hopefully everyone enjoyed reading my Options Training Part 1, understanding the basics (located here: https://www.rolexforums.com/showpost...postcount=6217), this will be imperative to understanding all of my future posts on options as it sets the foundation to effectively using options. Please note I write all of this as I genuinely enjoy educating and helping people, my goal is for all of us to make more money and control risk while doing it - please note I am not responsible nor liable for what you do with option trading.

What is a covered call?: A covered call is an option strategy that allows you to generate very low risk (essentially free) income on your existing stock positions. This means you currently own the underlying stock and you would write (sell to open) a call which then IMMEDIATELY adds income to your account. Note this is very different from buying a call as previously discussed. We will cover writing naked calls and puts in a different post, for now, stay away from writing naked calls as these are very risky and have unlimited max loss. This is also an excellent tool to use as an exit strategy, GET PAID TO SELL YOUR STOCK or reduce the cost basis of your existing stock.

IMPORTANT We write covered calls on stocks that we believe will have limited upside movement or will trade sideways, want to get paid to sell a position we were planning to sell anyways and or stock we are okay with it being "called away" (more on that later). This means the stock you own can be assigned and you have the potential of early assignment. There are ways to hedge against your stock being called away from you, we will discuss later too and how you can use the income from your covered calls to generate more total return. Lots to cover and a real life example will put all of it together!

The easiest way to learn is through a real life example, so lets work our way through one and the possible outcomes.

Lets use CRSR as an example as I have seen discussed several times on here. In our example, you own 10,000 shares of CRSR for a current value of $384,300 (sp today is $38) - note I do not own CRSR, this is for example only. Now you want to use your existing CRSR stock to generate income. Remember from part 1, 100 shares = 1 option contract.If you own 10,000 shares that means you can write up to 100 option contracts (100 contracts = 10,000 shares). You do NOT have to write the same number of contracts as shares you own, so you can write less than 100 contracts in this example. You should NOT write more contracts than shares you own.

EXPIRATION: The longer the expiration the more premium you will collect, this should be intuitive as this is the longer the buyer of your option has for the price to hit the strike - this will make more sense in the example. IE a march $35 strike is 1 month from expiration, not much time for stock to appreciate to the strike you selected compared to a dec $35 which is a much longer expiration and thus more time for the stock to hit your strike at expiration, the latter will allow you to collect more premium.

STRIKE PRICE: This is important, the higher the strike price you select, the less income you will generate as the less likelihood the stock price hits the strike price by expiration. When I pick a strike price, I look at 50 day and 200 day moving averages to see resistance in the stock price (also depends on conviction and expiration), then I pick a strike price slightly higher as there should be resistance at those levels. We will discuss how to pick strike prices via delta in black scholes modeling in a later post. You will also want to look at level 2 data so you can see what bids are at each price level for the stock. IE if the stock is trading at $30 and there are massive buy orders at $31 and $32, that means it will have significant resistance to breakthrough $32, thus a strike at $35 could be very profitable. We will also discuss this in a later post.

Lets use a short expiration and a long expiration in our example. The first is the option chain below for CRSR March 19th which is about 7 weeks to expiration. Notice the farther out of the money aka the higher the strike price, the lower the price of the call aka the lower the premium you receive.

Now, lets say you selected the $45 strike, you can see the last price was $4.50. Remember you are not buying call options, you are WRITING THEM (sell to open), that means someone is purchasing them from you thus they have to pay you the $4.50 per contract. Ideally you want to pick a strike price you would be comfortable selling your stock at. Generally you will hold these to expiration or until stock is called away from you.



EXAMPLE 1 COVERED CALL $45 STRIKE 3/19/21 You write the call (aka sell to open) at $45 strike with a price of $4.50. YOU ARE INSTANTLY CREDITED $45,000 of premium into your account. That is ALWAYS yours to keep regardless of what happens to the stock price. Ideally you want the stock price to stay below the strike price so your stock isn't called away - caveats mentioned later.

Scenario 1 of EX1 CRSR never reaches $45:There are 7 weeks until your $45 strike option expires. As soon as you write the option you were immediately credited with $45k into your account. In this scenario, CRSR bounces around but never hits $45 by expiration, thus it is not profitable for the buyer of your option to exercise the option at $45. This means that his option expires worthless, you keep your $45k premium and your CRSR stock.

What's the risk? Your option is collateralized by your stock, thus if the stock price on CRSR falls to $30, your 100k shares is now only worth 300k (this would have happened if you wrote the call or not) BUT now you have 45k in premium, so your loss is much lower if you just held the stock. You could have completely sold the stock but that would have required knowing it would fall to $30, so the covered call at least provides a nice cushion here.

Scenario 2 of EX2 CRSR trades above $45: Just like in Scenario 1, as soon as you write the 100 contracts you are immediately credited $45k in premium into your account. CRSR rallies to $50, the buyer of your option will likely execute the option and you will be forced to sell your shares (this creates a taxable event) at $45 strike/stock price (so you can see you missed out on $5 upside). This means you made the $45k premium from the option and the stock price went from $38 to $50 but you were forced to sell your shares at the strike of $45 and thus you made $7/share ($45-38 stock price now) which would be 70k. So in this example you made 45k premium plus 70k the difference between the price today and what the strike you are forced to sell at would be $115k total profit. Not bad!

What is the risk EX 2? The risk here is that the CRSR skyrockets and you would have missed out on all of that potential upside but we can hedge against that by...

VERY IMPORTANT HOW TO HEDGE AND PROFIT IF STOCK RISES: Lets say in EX 2 you want to write the covered call BUT you are worried the stock might continue to rise past the strike. You can take a part of the premium you collected in this option from writing a call and buy a call (buy to open). So in this example, lets say you took $20k of your $45k premium you collected when writing the call to buy a call on CRSR so you don't miss out if the stock sky rockets. I typically like to buy the call more OTM than the strike I wrote the call at, so in this example lets just say I bought the call for a $50 strike which is 3.36 last price. If the stock price goes on a run to $60, that call option would appreciate from $20k to 57.1k. Thus you made money collecting the premium from writing the call and did not miss out on CRSR running past the strike and your stock being called away. Another trick here that I use is I will take the premium from writing covered calls and buy longer dated leaps to hedge if the stock goes up in the long run. We can create artificial leverage for more call upside when we write puts but that will be a later post.

Lets look at another example of CRSR with a much longer expiration, Dec 17 2021, 9 months to expiration. The same $45 strike here pays $10.88. That means you would get a premium of $108k credited into your account immediately on writing 100 contracts. The difference here is the buyer who purchased this option from you has until Dec 17th for CRSR to hit the $45 strike. USUALLY the assignment of the stock being called away from you comes at expiration, however the stock can be called away prior to expiration). Nothing changes from what I mentioned in the two above examples, only difference here is you are getting more premium but your stock is being locked up for a longer period of time aka more time the stock could go down (you could close prior to expiration which I will cover later).


THINGS TO CONSIDER:

IMPLIED VOLATILITY: The higher the IV the more premium you are going to collect. Remember that higher the IV means the higher the implied volatility (stock moves in price more) which means more likelihood your stock gets called away. If you were planning on selling your stock, why not get PAID to sell it assuming the price doesn't crash (again we want to focus on stocks we don't expect much movement in)? The opposite holds true, if IV is low, you are going to get paid less to write the calls against your stock but less likelihood your stock gets called away.

OTM/ITM: The further out of the money strike you select, the less premium you are paid but also the less likely your stock gets called away. The farther in the money strike you pick, the more you get paid and the more likely your stock will get called away.

SELL BEFORE EXPIRATION: This is called a close out, you can buy back the covered calls, at a gain or loss and still retain your stock. You can do this to lock in early gains quickly, assuming the price drops, especially on short dated options as theta/time decay will kick in hard. Lets say you write a 30 day call, stock price goes down a week later, you can close out that call and lock in a good portion of your premium while not having to give up your stock.

IMT COVERED CALL When you sell a call ITM, you will not profit from the stock rising in price because it is already in the money, but you will collect more of a premium since it is more in the money and offers better downside protection. I typically use these when I am looking to sell a position and get paid to sell it, the risk here is if the stock crashes below the strike, I still get my premium but still own the stock which is now at a loss. You of course can buy an OTM put to hedge against this.

Dividends IMPORTANT: Make sure you take into account dividends before writing a call and selecting an expiration. Dividend payments prior to expiration will change the value of the option. Why? Because the stock price will drop by the amount of the dividend on the ex-div date. This is also a reason why call buyers exercise early. Most people overlook this.

This is covering a lot, please feel free to ask any questions and I can walk through more examples and add more clarity. More posts to come if people continue to find these helpful as they are quite time intensive. Cheers.

[jltait]

Anyone buying TSLA before earnings? My broker just called asking if I wanted to pick some up. (Yes I still use an old school broker. Fulfills my inner Gordon Gekko). What say you TRF?

[RBradleigh]

Just sold out of FSLY for ~ 50% gain, held strong refusing to sell between the 80-100 wedge. This nice lil pump seemed the right time to get out before a drop back below 100 (speculation)

Also finally took some profit from QCLN and purchased a few shares of GOOGL with it’s $70 dip.

With the leftover funding bought a few shares of Apple and Cisco. I guess I feel safer with funds in long established companies and Cisco’s 3% dividend in exchange for less growth potential. Who knows, perhaps Cisco will eventually purchase fastly?

Should I be kicking myself for not taking NFLX profits when it exceeded its 52 high a few days ago?

Thanks for all the info fellas :)

Be safe,

[smc23]

Originally Posted by jltait

Anyone buying TSLA before earnings? My broker just called asking if I wanted to pick some up. (Yes I still use an old school broker. Fulfills my inner Gordon Gekko). What say you TRF?

TSLA is one of my core positions. I have been accumulating a bit more.

[logo]

TBH the way the market is going, if TSLA and AAPL don’t have pristine earnings today I think they will sell off. Too many funds needing to sell out of good positions to cover shorts.

[chadwick4eva]

Originally Posted by jpeezy14@hotmail.com

I don't disagree with either of you. Many of these top names are now at a discount; look no further than my favorites of PINS and SE.

I am not worried long-term, because I do believe this will be short lived. The only thing it changes is my strategy on options; as I've mentioned, I've been debating on selling out of calls recently to get cash heavy and this is pushing me more and more towards that in order to buy the dip in shares vs. calls.

Not really sure how you see companies trading at 31x and 30x TTM sales, negative EPS, negative Free Cash Flow as "trading at a discount." That seems like full blown speculation to me as well. No offense but both of these companies are ridiculously overvalued. Wouldn't touch with 10 foot pole.

I have to say that the conversation in this thread has kind of devolved into useless speculative information and is no better than any of the aforementioned subreddits in terms of the content (except some of the options summaries by 7sins those are pretty great).

But basically there's been no balance sheet analysis, no product analysis and study of product quality compared to competition, no evaluation of management performance of firms, no intrinsic value modeling or discounted cash flow analysis, limited analysis of product pipelines, limited discussions of companies' business segments and how much they contribute to the overall revenue or profits of those firms, etc. Just a complete lack of actual high quality information and/or analysis. Doesn't really motivate me to contribute when all I'm seeing is "buying amc and going along for the ride," etc.

A bit of a bummer but this thread used to actually have some pretty high quality information in it. Now it just seems like an echo chamber with the same 5 tickers in it over and over.

As a contrarian I'm going deep on health and home/auto insurance companies at this point. PGR, ALL, HUM, ANTM (and to a lesser extent UNH) all look like really solid buys. PGR is down 5% today but sports a strong balance sheet, 5.2% yield, just beat Q4 EPS, and has 30% upside based on conservative DCF growth assumptions when I apply a 15% discount rate.

[owl.]

I am a rookie trying to get into stock trading.

Did you guys see that beyond meat (BYND) partnered with Pepsi?

I am going to put money into that and hope it goes well.

As a vegetarian, I see beyond products sell more and more.

And they are delicious as well!

[JParm]

Originally Posted by chadwick4eva

Not really sure how you see companies trading at 31x and 30x TTM sales, negative EPS, negative Free Cash Flow as "trading at a discount." That seems like full blown speculation to me as well. No offense but both of these companies are ridiculously overvalued. Wouldn't touch with 10 foot pole.

I have to say that the conversation in this thread has kind of devolved into useless speculative information and is no better than any of the aforementioned subreddits in terms of the content (except some of the options summaries by 7sins those are pretty great).

But basically there's been no balance sheet analysis, no product analysis and study of product quality compared to competition, no evaluation of management performance of firms, no intrinsic value modeling or discounted cash flow analysis, limited analysis of product pipelines, limited discussions of companies' business segments and how much they contribute to the overall revenue or profits of those firms, etc. Just a complete lack of actual high quality information and/or analysis. Doesn't really motivate me to contribute when all I'm seeing is "buying amc and going along for the ride," etc.

A bit of a bummer but this thread used to actually have some pretty high quality information in it. Now it just seems like an echo chamber with the same 5 tickers in it over and over.

Interesting take, and no offense taken, but please don't take offense to what I say below.

For the part that I've bolded - I'm not going to do your homework for you. I've said in the past what PINS and SE bring to the table, and there are endless amounts of sites that will bring you what you are looking for.

Are they expensive? Sure - so is the rest of the market. Are growth stocks going to trade at higher valuations than value stocks? Yes, that's why they are growth stocks; I don't expect profits, I expect growth. Take a look at how SE is growing and what they're doing to further their business, and then decide if that's what you want to invest in - not because I said so.

I think we use this thread to let people know what we're investing in, give our 2 cents on action in the market, and spread a bit of education / news as well. If you're looking for a full-blown analysis on every stock presented here, I think you've come to the wrong place.

[logo]

Originally Posted by jpeezy14@hotmail.com

Interesting take, and no offense taken, but please don't take offense to what I say below.

For the part that I've bolded - I'm not going to do your homework for you. I've said in the past what PINS and SE bring to the table, and there are endless amounts of sites that will bring you what you are looking for.

Are they expensive? Sure - so is the rest of the market. Are growth stocks going to trade at higher valuations than value stocks? Yes, that's why they are growth stocks; I don't expect profits, I expect growth. Take a look at how SE is growing and what they're doing to further their business, and then decide if that's what you want to invest in - not because I said so.

I think we use this thread to let people know what we're investing in, give our 2 cents on action in the market, and spread a bit of education / news as well. If you're looking for a full-blown analysis on every stock presented here, I think you've come to the wrong place.

Agree with this. And, if anyone does any reading in this thread they will quickly find there is a wealth of information from people who have been trading for a long time, advising on strategy - just trying to help each other. Contrary to what the poster has thought, there actually has been great discussion regarding specific businesses and products, along with analysis of fundamentals, technicals etc. But if someone doesn’t find the thread useful, it’s their loss not mine.

[jltait]

Seriously though appreciate all of the discussion and insight this thread provides, and all of the awesome members here. This week has certainly been a distraction with the r/WSB stuff, however. Nothing wrong with a little reddit style fun from time to time. Hopefully normalcy returns next week!

[RyanO]

What I will say, is that some great companies are currently on sale as a result of this GME speculative distraction.


Sent from my iPhone using Tapatalk

[DonRickles]

Thoughts on Nokia?

[jtli202]

Sold half my Fastly position as well. Like the Company's long term prospects but it's being pumped by this "short squeeze" madness. Have some small holdings in FUBO and SPCE so will look to sell those if they run up more. As someone mentioned here, lots of good high-growth companies are pulling back so I'm taking those profits and adding to those.

[gnuyork]

Game Stop - insane. I bought a small position at $11 a while back. I can buy a watch with it now! Debating cashing out. I have not been following any news of why this is happening.

[NYG1121]

I for one am terrified by what is happening and it is likely here to stay. It makes it very difficult to do technical analysis as the stock may move irrespective of fundamentals. Gamble at your own risk

[Baco Noir]

I had a trailing Stop Loss order in on my TGT position which kicked in today and sold my shares. Not complaining about 80% profit, but wondering if I should buy it back on the drop or move on to something else. Same thing happened to me a few months ago on COST and I haven't had the nerve to buy back in.

[sokoloka]

Originally Posted by DonRickles

Thoughts on Nokia?

Guessing it's one of the next Reddit fanboy stocks.

[avidflyer]

Thoughts....I think the earnings call is all ready priced into apple, if they don’t kill it to the extreme side we’ll see a pull back...BUT with the way the markets been acting no telling

[huncho]

Originally Posted by avidflyer

Thoughts....I think the earnings call is all ready priced into apple, if they don’t kill it to the extreme side we’ll see a pull back...BUT with the way the markets been acting no telling

my gut is telling me the same

[gnuyork]

Originally Posted by gnuyork

Game Stop - insane. I bought a small position at $11 a while back. I can buy a watch with it now! Debating cashing out. I have not been following any news of why this is happening.

Well, decided to sell my GME. Take the profit for once. It wasn't a large position, but it's a free Speedmaster now

[jtli202]

Originally Posted by gnuyork

Well, decided to sell my GME. Take the profit for once. It wasn't a large position, but it's a free Speedmaster now

Prudent thing to do. There are going to be people left holding the bag when this thing ends (aside from Melvin Capital)

[bimmer nerd]

Originally Posted by DonRickles

Thoughts on Nokia?

Too large of a float to make any meaningful moves long term.

BBBY or AMC are more likely to move if you're looking at stocks that WSB/Reddit might be able to influence.

Originally Posted by avidflyer

Thoughts....I think the earnings call is all ready priced into apple, if they don’t kill it to the extreme side we’ll see a pull back...BUT with the way the markets been acting no telling

I'm long Apple. If it drops on earnings I'll add more.

[logo]

Originally Posted by gnuyork

Well, decided to sell my GME. Take the profit for once. It wasn't a large position, but it's a free Speedmaster now

Yeah! Woohoo Certainly makes it easy to cash out with a fantastic watch on the other side of trade.

[JParm]

Originally Posted by gnuyork

Well, decided to sell my GME. Take the profit for once. It wasn't a large position, but it's a free Speedmaster now

Can't complain about that!

[owl.]

Originally Posted by gnuyork

Game Stop - insane. I bought a small position at $11 a while back. I can buy a watch with it now! Debating cashing out. I have not been following any news of why this is happening.

So why is it that GameStop blew up?

Any ideas?

[bimmer nerd]

Originally Posted by owl.

So why is it that GameStop blew up?

Any ideas?

Short Squeeze

[asloper6001]

7sins you are the MAN!!! Thanks for all you do and the great write up and information!!

[huncho]

Originally Posted by owl.

So why is it that GameStop blew up?

Any ideas?

gamma squeeze followed by short squeeze

[bimmer nerd]

Originally Posted by asloper6001

7sins you are the MAN!!! Thanks for all you do and the great write up and information!!

Agreed. Thanks Sins! I saved your post I will go thru it later on in the day. Appreciate the time and effort you put into it.