Why Weekly Covered Calls Are a Trap
43sChallenges a popular options strategy, sparking debate and curiosity.
▶ Play ClipAI Summary
The video explains why selling weekly or monthly covered calls on high-volatility stocks can lead to significant drawdowns, and proposes an alternative strategy of selling long-term LEAPS covered calls instead. The speaker illustrates with a concrete example showing how this approach can yield up to 50% returns over 9-10 months while limiting risk.
Chapters
[00:03]
Problem with short-term covered calls
Selling weekly or monthly covered calls on volatile stocks like HMS can yield 2-5% monthly, but when the stock drops, you face drawdowns and may be forced to sell calls at lower strikes.
[00:32]
Better alternative: LEAPS covered calls
Instead of short-term calls, sell LEAPS (6, 12, or 24 months out) to reduce volatility and improve risk/reward.
[00:47]
Example trade setup
Selling an at-the-money covered call expiring in 10 months: buy stock at $47.50, sell $50 strike call for $1,400 credit.
[01:15]
Risk and reward metrics
Net debit/max loss is $3,300, max profit is $1,650, which is 50% of investment over 9-10 months.
Selling LEAPS covered calls on volatile stocks can provide substantial returns (up to 50%) while mitigating the risks of short-term options selling.
Study Flashcards (4)
What is the main problem with selling weekly or monthly covered calls on volatile stocks?
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What is the main problem with selling weekly or monthly covered calls on volatile stocks?
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You can make 2-5% monthly, but when the stock drops, you face drawdowns and may be forced to sell calls at lower strikes.
00:03
What alternative strategy does the speaker recommend instead of short-term covered calls?
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What alternative strategy does the speaker recommend instead of short-term covered calls?
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Selling LEAPS covered calls with expirations of 6, 12, or 24 months.
00:32
In the example, what is the net debit (max loss) and max profit?
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In the example, what is the net debit (max loss) and max profit?
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Net debit/max loss is $3,300, max profit is $1,650.
01:15
What percentage of investment can be made in 9-10 months with the LEAPS strategy?
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What percentage of investment can be made in 9-10 months with the LEAPS strategy?
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50% of investment.
01:30
💡 Key Takeaways
🔧
LEAPS as a better alternative
Introduces a concrete strategy to reduce volatility and improve risk/reward compared to short-term options.
00:32
📊
Risk/reward numbers
Provides specific metrics showing a 50% return potential with limited downside.
01:15Full Transcript
[00:03] a high volatility stock like HMS. A lot of options traders they like to sell options on stocks like this and they sell monthly or weekly covered calls or cash secured puts or they try to wheel it. Now the problem with that is you can
[00:17] make 2 to 5% or even slightly more in a month but when the stock drops now you're left holding the bag and you are in a draw down and you can be forced to sell a covered calls at a lower strike uh than where you bought the stock at
[00:32] and that can also be a very volatile. You see a lot of big ups and down swings. But there is a better way to do that. What I like to do instead is instead of selling monthly or weekly covered calls, I like to sell leaps. I
[00:47] like to say sell six months, 12 months or even 24 month covered call. So for or even 24 month covered call. So for example, if I were to sell a an at the money covered call for LEAPS expiring in June of next year, which is about 10
[01:01] June of next year, which is about 10 months from now, and with that I can buy months from now, and with that I can buy the stock right now at 47 uh50 and I can sell a 50 strike covered call and for that I will get $1,400 credit. Now in
[01:15] this case, my net debit or my max loss is only going to be $3,300. is only going to be $3,300. And uh my max profit can be $1650 And uh my max profit can be $1650 which can be 50% of my investment. So if
[01:30] I can make 50% of my investment on a trade like this in about 9 to 10 months trade like this in about 9 to 10 months that is a great outcome for me.
