Covered Call Strategy by San Jose Options

This is an excerpt of a real class from our options mentoring program where mentor, Duane, is discussing the Covered Call option strategy.

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Covered Call Strategy by San Jose Options

Video Transcript

…get your foot in the water kind of event and things are going great until they no longer do and the realization of like what just happened and how can I guard against that comes into play. That’s why different strategies kind of can make some sense.
Now, I’ll also say something else that right now, personally, I’m not long in any position so definitely no opportunity for me to do a covered call. But I, personally, I have no opposition to a strategy, any of them, when the time is right. People do ask me that a lot. “Oh golly, do you do that kind of stuff anymore?” And the answer will be, “Yeah, I do but it’s only under select circumstances on the right vehicle at the right time. We’re going to look at some of that today on examples of what could be the right one to use and when it works and, of course, when it doesn’t.
Let me see on the chart here, yeah, it looks like pretty much everyone here in the session today as participated with that. I’m glad to see it ‘cause it gives you experience in working with the options, the option chains and so and so forth. Let’s go ahead and kind of go through the steps anyway and what the cover call really is and why we would want to use it.

Essentially, what we’re going to do is take a positions and try to make a little extra premium out of that and willing to sacrifice the shares that we own at the strike price if in fact the position moves into the money. It’s this covered because we have the position, the stalk already in the account that is going to be sacrificed if in fact the price really moves up higher and higher. It’s such a very important thing to understand. If you just solve a naked call position. Well, prices can go, you know, theoretically up to an infinite number. You’d have full exposure to that liability.

In a covered call, you’re protected from that because you already own those shares. Now what you have the risk of is you’re selling the right for someone to take those away from you and you’re bringing a little bit premium. But of course if you have any event like Netflix, where all of a sudden the stock virtually doubles in price and you got a tiny little 3% premium, then you’re kicking yourself because, “Golly, I should’ve stayed in that position.” That’s where it kind of gets around to. Trying to do the right thing at the right time and some of these things we just don’t know about. But those are ultimately the risks around it and a few others that we’ll talk about too.

Again, we’ll just look in to take a position that we already own, we’re selling options to bring in additional premiums, so some income against it and we’ve got the shares that we’re protecting ourselves with, in fact, if the market really moves up a lot.
Here, let’s just talk about what I have on the screen here.