0DTE Covered Calls: Full Breakdown & Transcript

[00:00] We do a bunch of stuff in zero DTs. Every Thursday. Every Thursday we do zero DTs.

[00:12] And today, got some cool stuff for you. Covered calls in zero DTs. We're going to look at bullish positions. Covered calls are a basis reducing strategy that takes existing long stock and its positive data component to that to increase your probability of profit.

[00:27] What that means is if you buy stock, let's say it's whatever, you know, 50-50 or something like that, and if you sell a call against it, it improves your probability of profit significantly,

[00:39] probably by 20-25%, and at the same time, it limits your upside. That's the whole tradeoff. Okay? So in the yin and the yang, that is the yin and the yang. So you can see right here, we gave you a spy example.

[00:53] If you bought 100 shares of stock, your max profit is undefined, and your pop until June, 50-50.

[01:05] But if you buy 100 shares of stock and then you sell a 25 delta call against it, the amount of money you put up is the exact same. Your max profit goes from undefined to limited, and your pop goes from 50 to 65, which is basically 25%, like I said.

[01:21] Right, we're looking at June here, not the zero-day options, correct? No, no, this is June. This is showing an example of this. Just an example, I get it. I just want to make sure there's a covered call example. I understand. Classic covered call. When you do covered calls, hopefully when stocks are a little oversold, volatility is higher, that's perfect world.

[01:38] But when it's net, you expect it to go higher. Definitely do a covered call. Covered calls are bullish positions, period. You can do covered puts too. Those are bearish, but short stocks, short puts. But a covered call, long stock, long index, short call.

[01:52] That's it. One to one, whatever it is. Ten to one, whatever. In zero DTEs, we could do the same delta covered call and collect much less.

[02:05] If we put this on every day, what are the results compared to doing a typical longer duration covered call? So instead of doing buying stock and selling a call 45 days out,

[02:19] what if you bought stock and sold a call every single day? Do-do-do-do. That's a good one. I have to assume from the data that we have, they couldn't pick a specific time in the day,

[02:33] like 2 o in the afternoon an hour before the market closes probably closing prices correct I don know if he used closing prices the day before or opening prices the next day but either way would work out the same over time

[02:46] I think I can find out. Okay. Okay, but either way would work out the same over time. So the question is, if you write a single call every single day, versus if you did one 45 days out, what's going to work out better?

[03:02] Now, based on the fact that the zero DTEs have a lot more premium, I'm going to guess that the zero DTEs, writing a call every single day on the zero DTEs, is actually going to work out better because they're so much richer premium-wise.

[03:15] Because all the research we've done, if you use 45 days, which is our optimal time frame, if you were to do it each week, over time, you pick up like an extra week worth of premium. So I've got to assume the same as you,

[03:29] that this is going to work out a little bit better. So the net debit's the same. The net debit's the same. The max profit's obviously significantly lesser because if you're going to sell a daily 25-day option,

[03:43] you're selling one that's way closer to the money than if you were doing 45 days out. So your net profit's going to be, remember it was $1,300 anymore? It's $300 now. And your profit's going to stay exactly the same

[03:55] because it doesn't change your probability profit. Right? It won't make sense. Okay. I mean, the numbers out there are 25 delta. This is what it is. Yep. Let's do the next slide. So we did a study.

[04:07] We said if you hold 100 shares of stock and you sell 25 delta calls and you compared zero DTs to 45 DTs, what would happen? We recorded the P&L for the covered calls. For one day, the SPY went up $2 or $4 unchanged or down $2 or $4.

[04:23] We also listed the P&L on large updates where the SPY was up over $8. Okay. So we checked everything from 2.4, unchanged, minus 2.4, and then plus 8.

[04:36] I mean, the plus 8 is a little aggressive of an up move, but the 2.4, that's about the average move in SPY. With a 90% implied volatility, it's a $400 stock.

[04:50] You're looking at a 1% move, it's there. Yeah, well, $8 is 2%. but the other ones are half a percent, 1%, and unchanged, which is totally fair.

[05:04] Okay, that's totally, yeah, that's fair. Got it. Let's go to the next slide. Let's see how this worked out. So looking at the up days first, the zero DT covered calls made between 20 to 100 more money than the 45 days So we looking for something positive We looking for a positive takeaway from zero DTs

[05:26] Like how can somebody who wants to use zero DTs find a positive trade assuming that you're bullish? And we found was, and this is something that I guess really shouldn't surprise us,

[05:38] but if you're bullish and you wanted to buy an underlying like the SPY and sell daily calls against it, all right, instead of 45-day calls. Unless the market really craps out, it's going to be more peace, more family.

[05:54] It's really what it comes down to. It's exactly what you would expect. I mean, the risk is the same, same probability, but since it's such a short period of time, that probably is going to play out each day. So a day like today right now would not help you.

[06:07] A day like today would move against you. Unless we have a comeback in the market. Unless we have a comeback. But normally, you know, most of it was basically long delta, right? Yeah. Just all stock. Now, just so you know, this is not the easiest thing to do because you're going to sell a 25 delta call

[06:21] and you're going to be like, okay, well, you don't have, you know, there's a lot of days. We're going to say this is a brief. A lot of days we're going to cap you out, things like that. But whatever. On unchanged days, you profit the full value of the call on the zero DTE.

[06:34] But only a single day single on the 45 days. That's the whole difference. Mm-hmm. So we looked at here. We put the numbers up here. and if the, this is the P&L, the 25 Delta Cover Call,

[06:47] we did the zero DT and the 45 DT. And you can see here, just, you know, if the market's unchanged for the day, the 45-day DT makes a nickel, and the zero makes 40 cents.

[07:01] If the stock's up $2, and you just see, you make more money. That's all it is. And on the down moves, you're going to lose a little bit more money, because that makes sense, so the market's down less and less. It's kind of common sense what you would think,

[07:16] but you make a little bit more money when the market stays unchanged or goes higher. That's the extra kick you get for taking the extra risk. If we're unchanged marginally one way or the other, you're going to make more money.

[07:29] Let's go to the next slide. So on down days, the zero DT covered calls lost roughly 25% more than the 45 days. since the short call goes to zero quickly on a down day,

[07:43] you will essentially be long 100 shares with no protection. That's exactly what happens. So down $2, you lose a little bit more, but down $4, you lose a lot more. Down $8, you're obviously going to lose a lot more than that. Okay, we highlighted the part in red.

[07:55] Because you have no protection to the downside Other than the first whatever you know first few pennies Let go to the next slide

[08:08] So here's the only time on large updates, the 45-DT covered call outperforms the 0-DTs because the upside cap on the 25-Delta call is further out of the money. So the 45-day covered calls will outperform by almost 40%

[08:23] On days, the market's up 2%. So if the market has a huge up move, huge up move, then you're going to outperform on the 45 days because the other one's going to cap you out. The problem with the zero DTs is the move up is too much, you're gone,

[08:37] and the move down is too much. Neither of those don't help you at all. But anything in between, that helps you and you outperform. And most of the time, the market's in between. Let's go to the next slide.

[08:50] So the takeaways. On zero DT coverage calls, we see a 50% greater P&L in up days and a 25% P&L worse on down days than the 45-day coverage calls. I'll stop here for one second. This morning we talked about pot odds.

[09:06] And if you're talking about a 50-50 bet here, which the market really is, then the zero DT calls against your P&L on 100 shares of SPY, let's say, your good days are going to be 50% greater than your bad days,

[09:21] which are going to be 25% worse. And that's the 50-50 shot with pot odds. Okay? However, large updates will always be capped on zero on DT covered calls because the same options are much closer to the money

[09:38] than you would get if you went out 45 days. The point here is, if you were looking for a strategy for a bull market, that you like for a bull market and you want to sell daily daily zero DT options

[09:52] again, it's reasonable because you've got good pot odds. You make twice as much you make two times for every time that you lose that's pretty good. If you're bullish. If you're bullish.

[10:04] Yeah. You think you can get direction right more times than not? I don't know. You're just longing to hold on to it and use something you want to do every single day. It's worked out nicely. You know, whatever. That's all we put out there. Very good. So let's do a quick

[10:16] and then you think everybody can come back. We've got no joy. You're a friend of mine. This is Scott Sheridan. Next, let's take two lives.