Poor Man's Covered Calls Strategy in Robinhood

Poor Man's Covered Calls

In this video, the speaker explains how to use a poor man's covered call strategy to make consistent money in trading. The strategy involves buying an in-the-money call on a stock and selling a call against it with 30-45 days until expiration and a 30 delta.

How Covered Calls Work

• Covered calls involve buying 100 shares of stock and selling a call against those shares.

• To make significant premium, you need to own a large number of shares, which requires a lot of capital.

• Poor man's covered calls involve buying an in-the-money call on the same stock with 3-12 months until expiration.

• Look for a call that has around a 70 delta or chance of being in the money at expiration.

• This call functions like roughly 70 shares of stock.

Selling Calls Against the Call You Bought

• Sell a call against the long call you bought with 30 to 45 days until expiration and a 30 delta.

• Collect the same premium as if you were holding 100 shares but at a fraction of the price.

Real Example: Apple Stock

• Buy an October 15th $115 call on Apple with roughly seven months until expiration and around a 65 delta.

• Control shares of underlying stock by owning this long call position.

• Sell an April 9th $128 call against the long position to collect $375 in premium.

Risks Involved

• Taking on more risk than just owning shares due to extrinsic value and time decay.

• Need underlying asset price to go up throughout life of option to break even on long call position.

• Basis should always be buying into good long position rather than hunting high premium.

• Low implied volatility can increase the value of long call position.

Key Takeaways

• Poor man's covered calls are a good strategy for traders with limited capital.

• The strategy involves buying an in-the-money call and selling a call against it with 30-45 days until expiration and a 30 delta.

• This strategy comes with extra risk, but it can be mitigated by buying into a good long position.

Importance of Implied Volatility

The speaker emphasizes the importance of implied volatility when making any option play and provides a resource to check the IV rank for Apple and Tesla.

Implied Volatility (IV)

• Implied volatility is important when making any option play.

• 90% of people on Wall Street Bets don't consider it.

• Look up Apple IV rank or Tesla IV rank to check the stock's relative level of implied volatility.

Trading Below Average IV

The speaker explains how trading below average implied volatility can affect long calls and recommends using Market Chameleon to check the stock's relative level of implied volatility.

Relative Level of Implied Volatility

• Check Market Chameleon to see if a stock is trading below its 252-day average IV.

• If a stock is trading below its average, its IV will most likely increase back to its average, causing long calls to increase in value.

• Use this information when considering an option play for Apple or Tesla.

Theta Decay Over Time

The speaker discusses theta decay over time and how it affects options.

Theta Decay

• Theta decay occurs slowly at first and then more quickly as you get closer to expiration.

• Theta decay graph isn't linear.

• Buying calls with months until expiration slows down theta decay.

• Sell 30-day till expiration calls since they have faster theta decay.

Benefits of Buying Calls with Months Until Expiration

The speaker explains why buying calls with months until expiration is beneficial and compares buying options one month out versus one week out.

Buying Calls with Months Until Expiration

• Buying calls with months until expiration is cheaper than buying options one week out.

• The further out you buy your calls, the cheaper time becomes.

• Buying eight months out versus seven months out costs significantly less per month.

Delta and Risk Tolerance

The speaker explains delta and how it affects risk tolerance when buying long-term calls.

Delta and Risk Tolerance

• Buy a call with around a 70 delta for a 70% chance of being in the money at expiration.

• Adjust delta to meet personal risk tolerance.

• Lower delta call is cheaper but more risky.

• Higher delta call is more expensive but less risky.

Profit Taking

The speaker discusses profit taking and provides a chart representing the lifespan of a short call.

Short Call Lifespan

• If your short call hits 50% profit before expiration, close that position, take your profit, and sell another call.

• Time is your enemy when selling calls since more time until expiration means more time for elon musk to tweet something negative about the stock.

• Visualize your short option's lifespan using the provided chart.

Rolling Options Positions

The speaker explains rolling options positions and its different types.

Rolling Options Positions

• Rolling is closing one short call position and opening another with a different strike price or expiration date.

• Roll up by selling a new short call with higher strike price.

• Roll down by selling a new short call with lower strike price.

• Roll out by selling a new call that has later expiration date.

When to Roll Your Position

The speaker explains when to roll your position and provides a general idea.

When to Roll Your Position

• If you think your short call will be in the money at expiration, close your short call position and open a new one at a higher strike.

• If the stock is dropping and your short call position is near max profit, close the position and sell another call closer to a 30 delta.

• There's no specific rule that dictates when you should roll your position.

Long Call and Poor Man's Covered Calls

In this section, the speaker discusses the benefits of holding a long call that increases in value steadily. They also explain how short calls can provide a hedge if the stock goes sideways or down. The speaker then introduces poor man's covered calls as a good way to make consistent money.

Long Call for Steady Upward Growth

• Holding a long call that increases in value steadily is the fastest way to make a lot of money.

• Short calls provide a hedge if the stock goes sideways or down.

• Steady upward growth in the underlying means big upward growth in your long call.

Poor Man's Covered Calls

• Poor man's covered calls are an excellent strategy to make consistent money.

• You can bet that the stock will go down by selling poor man covered puts.

• This is useful when you need to inverse a position you read on Wall Street Bets.

Three Different Poor Man's Covered Call Trades

In this section, the speaker provides three different poor man's covered call trades at different account levels.

$1,000 Account Level Trade

• Buy July 16th 8250 AMD call for $200.

• Sell April 1st 89 call and collect $240 premium.

$10,000 Account Level Trade

• Buy August 20th 45 Corsair calls.

• IVs at relative low and this is actually a position I'm holding.