DOES THIS SOFTWARAE INDICATE WHICH TRADES WILL BE SUCCESSFUL? i KNOW THAT SMB IS ONE OF THE TOP COMPAIES IN nEW yORK! i HAAVE NEVERTRADED AND IS THIS SOFEWARE TELLL YOU WHEN TO GET IN AND GET OUT?
Thanks for this video. Synthetic covered calls can work great in a relatively flat market, but if the long call LEAP option is exercised due to expiring ITM, it would harm your ROI, especially if this happened early in the life cycle of the LEAP. I've found that the ROI can be even higher than using a synthetic CC by using low cost stocks whereby if they are exercised due to being ITM, it's not a problem, it's actually a good thing. If the stock price drops, selling an OTM cash-secured put on the same instrument can either 1. lower the cost basis because of the premium gained if it finishes OTM at expiration or 2. if it finishes ITM, and is exercised, it lowers the cost basis due to averaging down, which sets it up for a new CC. Thank you very much for not calling this trade a 'synthetic covered call' instead of a 'poor man's covered call,' which is inaccurate. I know Tom Sosnoff (along with 1000s or other traders), and I like him, but he did no one any favors by popularizing that low brow term, in my view.
Sounds good in theory, but make sure you're not in a deep bear market as we've recently experienced. It's a tough, gut wrenching experience when you see your LEAP Options loose 70%, 80%, 90% of their value (and the delta all but disappears), while you're selling synthetic covered calls against them the whole time. The value of the calls sold will not match the loss in the underlying LEAP Option in a vicious bear market. And since no one can predict the future, you may be underwater for a long time. At least when you own the stock, the delta is ALWAYS 100. Lesson: there's no free lunch! Be careful!!!
It's good if you know how to pick your stocks in any market. The problem with this answer is too many people are randomly bullish on random bullshit for no reason. I have been trading for years and so few people understand what makes a stock actually be bullish or have much of anything strategy. He chose Exxon because it was strategically a better bet than most things in the market, most people would execute this strategy and just guess on silly stuff like tech stocks not having any understanding of why tech stocks go up.
Thanks for this amazing information !! If you don't find a means of multiplying money, you will wake up one day to realise that the money you thought you had, has finished. Investment is key, I pray that anyone who reads this will be successful in life
Very true, I started investing before the pandemic and that same year I pulled a profit of about $750k with no prior investing experience, basically all I was doing was seeking guidance from *ROCHELLE DUNGCA-SCHREIBER* who's a guru in the game, you can be passively involved with the aid of a professional.
*ROCHELLE DUNGCA-SCHREIBER* is my portfolio-coach, I found her on Bloomberg where she was featured, I looked up her name on the internet. Fortunately I came across her site and reached out to her, you can verify her yourself.
Not so much since you'd also lose money when holding the underlying. What he's showing is how much you can leverage your position from: selling stock-covered calls > selling syntethic calls > selling synthetic calls with LEAPS.
@@rotierender_lurch When you lose money owning the stock there are other things he didn’t encounter with option because with stock you don’t have greeks and you don’t have volatility playing with stocks the time in your side and you also get dividends , so managing a trade in a bear market will be easier if you own the stock as you can chase it down by keep selling weekly CC With leaps it will be very hard and doubling the leaps is doubling the risk So yea the example is a cherry picked But for sure we cannot say easily that synthetic CC is better than real ones
All fun and games until the underlying starts to tank. With owning the stock, you at least collect the dividends while waiting for it to go back up (assuming you picked a solid company with good fundamentals). With LEAPS, you lose the premium paid + ability to sell covered calls if the underlying tanks.
I have been watching and learning from a variety of traders, chart technicians, trading mentoring "services" for about two years now. SMB is by far the best resource for the human side of trading. What it takes emotionally and how to build proper habits to become a good trader. As a former high performance athlete, I recognize all of this as essential to success in a difficult environment. Your approach is refreshing and most appreciated. Please keep up the good work
Exposure of the synthetic is less but the overall risk is an order of magnitude higher. I have simulated leap calls using Monte Carlo sim to quantify relative risk before I ultimately decided not to do them. They are good for small positions where you may not want a lot of exposure, but they can easily take your shirt in larger positions.
With selling covered calls there is no additional risk other than just owning the shares. The "risk" is an opportunity cost of not making as much, but the chance of dollars leaving your account are 0%.
This works great if the stock goes up. But what happens if the stock goes down? Your leap calls will be worth much less , potentially losing a lot of your initial investment and wiping out your income from premiums if not getting you into a loss. I'd expect you mention the risks with the gains...
The idea is to buy it far enough out.... Plus if you own the stock and the price drops, you'll be down all that money on the stock as well. You could instead of buying 10 or 20 contracts, buy 1 or 2 or 3 DITM and then, you still lose less if it goes down and you can keep selling more calls while waiting for the LEAP or the stock to rebound.... If you buy it because you think the stock will go back up, then that's why you buy the LEAP as well.... Once it gets closer, roll it on out -- pay a litttle more.... but roll it out and extend its life.
And use the farthest out dated long calls on indexes like SPY or QQQ . XOM could crash and never recover. Pretty sure SPY and QQQ will recover. No history of them not recovering. But we do know individual stocks/companies can crash to zero. So I say XOM and his delta used are poor examples of prudent risk taking. Oh, and lots of distracting advertisements throughout this video.
Basically this is a leveraged play. When the market corrects you need extra cash to buy and hold the shares else you will lose everything. I wish you also explain the risks on the bear side
Great video. I have been practicing both the covered call and diagonal, as this strategy is also called, a bit and found my biggest question is, what is the best way to pick the underlying stock for this strategy? You don't want it to go down too far and don't want it to go up too fast. I'd love to see how the stock is picked. Thank you!
@@bbb_888 True but low beta stocks have low option premium. You have to accept little premium income or sell closer to the money options with higher chance of going in the money. There is no free lunch.
Of course these hypothetical examples are hand-picked for demonstration. But that being understood, I have questions also about the selection of the strike price. Looking at that chart, it was demonstrably higher option price than strikes both above and below. The other area I’d be curious to see more information on is how to secure execution since slippage, liquidity, and timing seem critical. I’ve used multiple retail brokers, and options seem to be tricky to get approved, especially if they’re combo or complex options. What tools or brokers can you recommend on a scale of useful/reliable to difficult/complex? Thanks for the excellent video and idea, though!
The options you buy you want to be deep in the money (DITM), the options you sell you typically want to have at least a .30 delta, technical analysis is also needed and the underlying stock and it's volatility should be taken into account. As far as retail brokers, interactive brokers is supposed to be good but I don't have much experience, the thing taken into account most is funds available. You should have 3x the margin needed to cover max loss. So the amount of cash you have in your account is the biggest factor, then experience. I assume the experience they want you to have is "buying" options as the max you can lose is the premium you pay.
Great content. Please please, do a video on the cost of carry of this trade, and also how to manage depending on different situations, for example what if the underlying rallies in either direction. What if it goes down a bit. Etc
With markets tumbling, inflation soaring, the Fed imposing large interest-rate hike, while treasury yields are rising rapidly-which means more red ink for portfolios this quarter. How can I profit from the current volatile market, I'm still at a crossroads deciding if to liquidate my $125k bond/stocck portfolio.
The market is volatile at this time, hence i will suggest you get yourself a financial-advisor that can provide you with entry and exit points on the shares/ETF you focus on.
very true, I started investing before the pandemic and that same year I pulled a profit of about $600k with no prior investing experience, basically all I was doing was seeking guidance to make a from a financial-advisorr, you can be passively involved with the aid of a professional.
Thanks, I merely looked her up on Google and was highly impressed by her credentials; I got in touch with her because I need all the help I can get. I just set up phone call.
I'm trying to figure out the overall SMB Capital strategy with these videos that go into good detail but lack the most important part, even a mention of the downside, the strategy to exit if the trade goes wrong. It would be complete if they would give their conditions on cutting losses; delta on the long CALL, or something like that. They should beef up their videos overall.
Another great video by Seth! The real risk is if it drops below your LEAP purchase price. A LEAP expires so that would be a loss. Stock doesn't expire so it can go back up again and you can continue to write calls against it. It's true you lose less at that time frame with LEAP strategy so less risk. Pricing of the LEAP and the CALLs will be important along with the management of them. So, still risk. Morale of the story, don't put all your money/eggs in one basket. Make one stock a strategy with a part of your portfolio, not all of your portfolio. No matter how good the strategy is there is still risk. Example: The bank stocks look great for this right now! BUT you would be amazed at how far they can decide to drop and could even go under! Be careful!
Have a question please. I understand buying a LEAP option 365 days out deep ITM 1 contract. But to sell a covered call OTM for a 30 day expiry on the same stock (synthetic covered call) don’t you have to own the 100 shares first?
No he’s basically selling naked calls is the second scenario. That’s why it’s referred to as “synthetic” cause it’s not a true covered call. In fact, it’s not covered at all
@@markbloyd9852 get back in your box please! Learn to speak when you are spoken too. Have a great day! Just cause your mother said your important doesn’t mean you truely are! She had to say it…
The “quadruple” return is from doubling the risk. Poor man covered calls are for the impatient investors. This mentality often results in investing in stocks you know little about and you will end up holding the bag when they drop 30-40% and your leap goes out of the money and its delta drops to 0.4
Well, what exactly of the mechanics of this trade? What delta of LEAP your are purchasing and the delta near term you are selling? When do you get out? I supposed this would work if the stocks in uptrend but if down trend continues would be painful! And what type of stocks would work with this strategy? High beta stocks may be too volatile for this especially if it goes in the opposite direction.
you can collect monthly rent .. but at the end the "rental Property" ( the stock) will be condemned.. if the market drops. Then you lick your wounds and repeat...
Investing in alternative income streams that are independent of the government should be the top priority for everyone right now. especially given the global economic crisis we are currently experiencing. A variety of stocks and digital currencies are still attractive investments right now. In just 5 months my portfolio grew by $300k in gross profit, the main thing is to diversify your portfolio and you will see amazing results by investing smartly.
Surely these are desperate times, but in my opinion, there is no market condition that a good investment advisor cannot ride through, especially those that have existed since the 2008 crisis and before.
I agree, I was on the sideline for awhile observing, trying to figure out the best time to get in, that was before I came by a CFP, commended by a pundit on Reddit, reluctant at first but I went ahead and got in touch with the CFP, long story short, it's been 3years and counting and I've made over 1.5million dollars simply by following her guidance. I took a vacation to Bahamas this summer just to reward myself a little for the consistency lol. GREAT SUCCESS!!!!!
@@Americanpatriot723 Mind if I ask you to recommend how to reach this particular CFP you using their service? Seems you've figured it all out unlike the rest of us.
@@Suntz_u "LISA ELLEN SHAW" is her name. I initially came across her on a CNBC report then on an investment newsletter and at once searched her on the internet, best decision I've made to stay afloat these crazy times. She has been exemplary.
@@Americanpatriot723 I am going to look her up too, I have about $81k i want to start with, might be small but it's better than nothing though. Since the 08 crash is playing out again.
Thanks for this video - I've been selling covered calls for awhile now and haven't heard of this but its genius. One thing you didn't mention was that owning the shares will return a dividend (in XOM's case, it returns 3.21% annually) and if you time it right you would have collected it twice which would have been roughly $1,800 in that time period. Also curious how you feel about selling a cash secured put after the option is assigned and you are forced to sell the shares rather than buying the shares back and selling the calls on them.
It's a cool options trading strategy but carries substantially more risk in a bear market than a CC strategy. Be careful implementing with too large of share of your portfolio EDIT: I am referring to the PMCC (poor man's covered call) strategy in the video carrying more risk than a standard covered call. As noted below, the cash-secured put and the covered call have the same risk profile at open.
@@beanwithbaconmegarocket That's incorrect. Covered Calls and Cash secured puts have the exact same risk profiles. They are essentially the exact same trade.
@@justinpliskowski153 you're exactly correct about CC and Cash-secured puts. But in my original comment I was referring to the Poor Man's Covered Call strategy in the video being different that a CC.
@@justinpliskowski153 Not the EXACT same trade, because you can lower your collateral at risk with a cash secured put by rolling an in the money strike down, one strike at a time, and out to a further expiration, for a net credit. You get PAID to lower your collateral at risk. With a covered call, you CAN roll the out of the money call strike down, to earn more premium, BUT you can't lower your collateral at risk, because you own the shares, that are losing value, as the share price drops. On the bright side, you do get the dividends while owning the falling shares. LOL
In the last example you had to buy back the call at a loss. You better hope the leap call is worth enough to offset the cost of the buyback. I think I would buy the 20 leaps but sell 10 calls just in case there is a run up on the price. This way half your leaps keep appreciating and your loss is cut to half when buying back the covered calls
What about setting your covered calls for end of week, vs end of month expiration? And I say that because I would have a fear, that at SOME point within 30 days, it would be more likely that the stock with hit or surpass the strike price, vs within one week.
This can also be viewed as a long dated calendar spread campaign. While the potential returns are good, it is not less risky than actually owning the stock even if the initial cash outlay is lower. Due to adverse price changes and time decay your losses can potentially be much more than owning the stock.
Isn’t it really a diagonal because the Short calls that are sold for income are nearer dated than the long leap calls bought? But your point is still correct I believe. I also agree with some other comments that the strategy does not work - not only is it less profitable it’s actually a loser if the underlying falls in value significantly. And even if it dies not fall much, time decay on the leaps may quickly eat up the overall profits. With options it’s always rhe same, there are trade offs. Btw this strategy is also sometimes called a poor man’s covered call. It has benefits but as others note, it is way more risky if the underlying fails. Feel that Seth should have noted this. He clearly knows it
@@stevesyoutubechannel1433 Very close Steve... It's a diagonal yes but not because of what you said. It's diagonal because the strike prices are different for the two positions. Calendar Spread are the same strike at different dates. Great intuition tho! There is definitely a great deal of risk in this strategy yes, you're relying on a leap option maintaining value on a very forward future outlook. If that fails, which it absolutely can, you're in a very awky position.
@@DeviantFox That last bit you said is really the crux of it. They've constructed this video as if the strategy is a simple variation on the covered call and didn't bother to outline the risk. Any strategy looks good when you backtest a stock that moved in your favor. They're just trying to rope option newbies into using their services. Because experienced options traders already know all this. But if they properly explained the downside risks, the novice options trader who gets small returns on CCs would not be interested. Very shady imo.
Game changer! 2 quick questions though boss: 1) what delta should I be looking to sell? I heard like .2 was a good place to start. And 2) if it dips below the far out call, is that an immediate sell and exit? Thanks!
Love the Video and Thank you for taking the time to make this. One question and most likely missing something. Would you be able to save a little on that one loss in the synthetic deal by just buying the stock on expiration date at 105.86 or even slightly lower. Then letting the options assign at the 105. This would make an 0.86 x 2000 = 1720 loss instead of the 0.98 x 20 contracts (2000 shares) = 1960 loss. I know you would have to use more capital to do this, but you would be getting it back when the contracts assign and it would be back in the account to trade again on Monday morning. I also understand that the synthetic way in the video is best with limited funds. Again, thank you for taking the time to share this and happy trading.
great video! been doing this since last year (puts and calls) and it does work...just watch your greeks...dont wanna get ran over. Also, take profits while you can...(roll them leaps upwards)
Covered Call vs Poor Man's Cover Call is not a "simple tweak" There is a fundamental risk level in buying a LEAP vs buying Stock - which you didn't even mention. LOL
I keeps you from having to come up with the full amount of either owning the shares and having covered calls that way, or keeping the funds available in your account the entire time. Your broker isn't going to let you just sell options without having them covered in some way.
A stock that went up 21% in 6 months in hindsight you can make a lot of money in a lot of different ways. In a sideways moving market the likes of which we have been CC strategies look attractive but in the long run they underperform Long only strategy. Many studies have shown that. Seth please make a honest video about where u show examples where u wrote a covered call on stock that fell sharpely snd not recovering for years.Please discuss how to pick the right stock for such strategy and how to handle it if the stock drops significantly.
Nice return, but very little downside protection if the underlying plunges. A better way would be to create a DITM debit spread using leaps and neutralising the max possible loss through near month otm credit spreads. Once that's done, keep on selling otm credit spreads and collect profits. This ofcourse is contingent on the leaps having enough liquidity, which most of the time is a pita.
interesting. so youre saying, instead of a ditm call option use a ditm debit spread, and instead of short calls use otm credit spreads. i've never thought about doing this. what it lacks in relative profitability, it makes up for in increased hedge. i guess you could always increase your size if you wanted to...
@@vinnyvidivici5930 You can definitely scale it so far there's enough liquidity. SPX and any other European style option works absolutely good with it. To refine on what I said, this strategy is directly influenced by pmcc. Though it doesn't have the usual drawbacks of a pmcc, some of which may include stuff like a wide bid-ask spread on the debit legs. I place the debit spread 2 years out. By the 6th/7th month, I can recover the entire risk on it. That leaves me about 1.5 years of a no risk zone. 1 thing to keep in mind is not to place the credit spreads too near-the money. A general rule of thumb that I use is that if the distance in-between the legs of the debit spread is 1 standard deviation, place the credit spreads 3 standard deviations from spot. That way, you'll weather the huge bid-ask spreads on the debit spread.
I did dip my toes in the selling covered call options but didn't graduate to the synthetic options...yet. What I did "learn" is getting comfortable with the process of selling covered calls. However, what I'm wondering is about the shares being assigned once the price reaches the strike price. During one of my session, the stock did go above the strike price of the option, so I assumed my shares would be assigned. I checked and the shares were not assigned. A week later, the option expired and I still have the shares. On the date of expiration, the share price was below the strike price. Based on this video and from others, I thought once the share price exceeds the strike price, the shares are immediately assigned away.
You forgot to mention that a "Synthetic Covered Call" is also and arguably more commonly known as a "Poor-Man's Covered Call." Your video here for instance is the first time I've heard it referred to as a Synthetic Covered Call for example.
Question. I'm in a stock at 26.40. It's at 34. I can write a covered call and pick up 1.1 premium for a 40 strike for November 16. Not married to the stock. I calculate this is about a 4% return if it gets called away or about 16% annualized. Is my math right here?
Can you help me find the video where you discussed selling SPX calls for monthly income? It could have been selling puts. Im not sure. The one thing i remember is Seth mentioned Warren Buffet.
Reading some of the comments, a lot of people are saying what is being explained here is "investing". It IS NOT! It is trading. It is speculative activity. Owning and holding a stock, because you like the company and feel it will grow in the future is investing. Running options strategies of any kind is trading. Please don't mix them up.
Depends on your broker. Afaik they take the cash from your account to cover all costs. You'll get a notice (margin call) if that's not possible, then you have to decide (provide funds, sell stocks, ...). Most brokers let you close your trade in one go. So you exercise your option and hand the stocks over to the other guy you owe. All in one step and no extra funds needed.
Exercise your options. In this case, by exercising his options he would have been buying the stock at $75 ea, at a cost of $17 ea (his initial purchase of the options) his breakeven is $92. If the options he sold were exercised at $97, he would make a $5 profit. Multiply that by 100 per contract, in this case he had 20 contracts so multiply that by 2,000 and that is the P&L, $10,000 profit. That's why you want to buy the leaps deep in the money (DITM) and choose a stock that will either go up or at least stay above your breakeven point. Since you collect premium every month, your cost basis and breakeven point will go down, that's why it's important to keep track of your P&L.
@@fredmarzillier750 please don't exercise the call unless the option has about zero extrinsic left (which will not be until closer to expiration or maybe a little sooner if a dividend) You can re establish the position after call assignment by buying a new covered call: +100 shares -1 call This will replace both the shares that sold and the short call position Obviously be careful with this video's proposed strategy since you could end up short shares and that can be very expensive or prohibited in some accounts.
More reward, always more risk. A little misleading to call this a "less risky" strategy than covered calls. Your max loss is technically less, yes, but you need the stock price to rise during the duration deep ITM long call, otherwise if it remains even or goes down or even if it only rises slightly towards the expiration date, you will lose big. You have to be really, really good at fundamental analysis and pick a deeply undervalued stock near the bottom for this to be worth it, in my opinion. I will only do this on a few small picks every year. Real covered calls have better risk/reward for most people in most situations, I think.
I will be forever grateful to you, you changed my entire life and I will continue to preach on your behalf for the whole world to hear you saved me from huge financial debt with just a small investment, thank you Veronica Hoy.
Wow. I'm a bit perplexed seeing her been mentioned here also Didn’t know she has been good to so many people too this is wonderful, I'm in my fifth trade with her and it has been super.
She is my family's personal Broker and also a personal Broker to many families in the United states, she is a licensed broker and a FINRA AGENT in the United States.
Equity options with at least 1 year until expiration. They are primarily using the long call to get exposure to share price movement but essentially through borrowing (you buy the call and the other side typically buys the stock, so the call premium includes an extra fee/carrying cost for the capital you are not spending today on the shares)
Question: I sell to open a SOFI option @$7 with expiration date of 2026, think it was doing a LEAP call option. SOFI is well over $10. How should I close this long term cash secure put without looking money cause the stock is already up.
Yes, but if you're considering the covered call, you're already bullish. What they don't cover is volatility, rate exposure, dividends, etc, which cause calls to differ from stock
@@OurNewestMember you’re also failing to account that somebody is holding the stock regardless of the level at that versus a covered call technically could be worthless if it just bought with leaps one you hold the actual stock and it could be down a large amount but the leaps might literally be worth 5% of what you bought them for a very bad period even deep in the money leaps can go out of the money and bad scenarios
@@ssing7113 yeah I said "what they don't cover is volatility" The stock falling so much that the LEAPS is worth 5% or zero would in fact fall under the category of "volatility" If you are long downside volatility, this works out for you (less loss than holding shares, although you shouldn't be so long Delta in the first place), but if you are not long volatility, then the long call will waste your money on unneeded volatility premium
but the part that is missing is that when you buy a naked call leap, brokerages firms also locks up around $150,000 to buy a naked leap call $75 x 20 x 100 = $150,000 + $35,320 (cost of the leap)
Thanks for this great Video, I am an Option (Income) seller, and I enjoy this kind of videos. One thing I did not get from you is at what Delta are you buying the long Leap ands selling the Covered Call. I appreciate your reply. Thanks
Generally in this strategy you'd do the opposite extreme of the expected move over that timeframe. So in this case of a covered call you'd do the lower end of the expected move.
I'm new to stock market /Crypto and would like to invest but I've go no idea on how to make good profits. Pls what's the best approach you'd recommend?
This works on a relatively stable stock. However, the problem I personally experienced is when the stock drops like a rock, for whatever reason, and then snaps back up quickly. Buy stock for $100 but it drops to $80. Your covered call is at $85 but stock rallies to $90. Capital loss ensues, unless you buy back call option and extend the time frame. No one has a solution on how to remedy this scenario. I guess if they did, they would be rich.
I actually already knew about synthetic positions! But normally they give you 100 or so delta, I hadn't considered doing a 2:1 position for the purposes of writing calls against it. Neat idea.
@@FlyingSagittarius I've found it depends on the strike and expiry, to a small degree. I've seen an ATM leaps synth future with 102 delta, for example (but that's splitting hairs). I think you can also get a deep ITM put or call and that'll usually have 98, 99 delta as well (but often no volume or huge bid/ask spread)
What are the flaws to this synthetic strategy? a downwards trending stock? When should you close the leap calls and would it be safer to purchase a 2y leap call instead?
@SMB Capital, i have 2 questions: 1 Does the option price have an impact on the strategy you have just developed? 2 How can I exercise an option before expiration
1. The premium or option price ALWAYS matters in every strategy, as well as the bid/ask spread (i.e. how much potential profit you'll might lose in execution). For this in particular, the idea is to collect enough premium at the end of the expected move to avoid assignment and justify the risk to the downside if the market bears. 2. You almost never want to exercise an option, especially in a covered call scenario. You want to exit position to close prior just prior to expiration UNLESS you're wanting assignment of those shares. You can use an option to reduce your cost basis in that case.
@@DeviantFox thanks for the answer, could you explain me more, for the first question, does it mean, if i set a strategy, for example in the case if the price goes above the strike price my profit will be 10$, and at maturity the price is above the strike price, did my profit = 10$ or it will depend on the price of the options taken in the position ?
2) To exercise an option, you call your broker and tell him you want to be a donkey, by exercising the option. Like the other poster said, it is rarely a good idea to exercise your long option. Why? Because you lose the EXTRINSIC (time) value of the option when you exercise it. You make MORE money by SELLING your option in the open market, rather than exercising it. If you really meant to ask, how do I CLOSE my short option, before expiration, then you do that by placing a 'buy to close' trade order.
The margin of buying a synthetic long dates ITM call is as much as buying the underlying stock. Would this significantly lower the return of this strategy?
Synthetic long is not the same as a long call. The synthetic long spread will tie up more margin/risk (than the long call) but has a higher expected value because you are selling off the volatility exposure (downside protection). So they are a trade off. If you have risk-based margin, the synthetic will have a similar margin requirement as shares but not require as much cash capital, so it doesn't provide notional leverage, but it would provide borrowing leverage at a predetermined rate (eg, maybe it is cheaper for you to "borrow" capital from options markets than to take a margin loan from your broker for the cash to buy an equivalent number of shares)
Essentially the difference in expected value of the long call versus synthetic long is primarily due to volatility and leverage needs. If you expect high volatility (especially to the downside), then the long call will have an advantage. But if there's not enough volatility for you to capitalize on, then the long call would likely perform worse Other factors like interest rate volatility will affect the positions differently, too
To me, it depends on the IV and volatility of the underlying. One idea I like it so look at the cost of an ATM strangle; the breakevens here will tell you where the market is forecasting the price to move by expiry (this represents the optimal risk/reward, as I understand it). Of course, it can still be incorrect, but you can gauge the market sentiment and price your position accordingly.
If you're avoiding assignment you'd want to be at the best premium gain for the expected move. Sometimes this is exactly where the expected move extrema is, others it's just 1 strike inside (or more). Your thesis also has some bearing on this too. As you get closer to ITM your premium gain is higher so if you're more bearish on the underlying you can go closer to the ITM strike.
You shouldn't sell covered calls at a strike price less than your cost basis because if you get assigned you lose money on the LEAPS. OTM LEAPS are above the strike price by definition, and when you add the premium paid for the call, your total cost basis on the LEAPS is likely well above the current market price. When you buy ITM LEAPS your cost basis is likely to be closer to the current price - as a general rule, the deeper in the money you are, the lower your overall cost basis when you add the premium you paid for the call plus the strike price at expiration. You'll need more capital to start, but you're less likely to lose money if you get assigned.
This campaign works becase the price of the stock fluctuations where from $84 to $104 in 6 months , so the success in this case is when the stock is really stable
Thank you for the great idea of using synthetic covered calls. i never knew about these yet! COOL! I heard it called in out spread also? thank you SMB!!!!!!!!!!!!
Syn CCs carry substantially more downside risk than a covered call. They should have explained this. If you own Exxon and the oil market falls out, you may have to weather a year or so of holding a stock with negative P&L, but at least you still own shares of a solid company. If you're running a synthetic CC strategy, you could go bust. It's a fine method of options trading, but understanding downside risk and position sizing is key. These guys are not good teachers because they didn't explain either one. They also didn't explain how to manage this position when it moves against you.
@@beanwithbaconmegarocket One observation I've made about SMB, their videos are actually infomercials, designed to lure you into buying their trading courses. IMHO It is in those trading courses where they go into full detail about all the risks.
@@thomasd5488 Yeah, I'm sure that's true. I just don't like that style of "education" videos. If they want to lure people more honestly they should frame it as, "Now these trades are way more profitable but come with more inherent risk. To overcome these risks, subscribe to our service and get the assistence of seasoned veterans."
I have found it works best with leaps and you can sell naked short term calls and collect div on covered stock if you want to add extra risk. Which often does not work as good as just leaving it and letting the other side of the trade take the deep ITM calls/stock you sold months ago. You can't really break above 10%-12% return on the year but it is very high chance trade that can be added too high risk trades to soften the bearish blow and keep avg prices low. You can even stagger the ITM calls and not just take them all at one strike.
Well it's a good bulish trade, and example was bulish so it all worked out. Option 2 market just goes sideways. Make a little on call premium flat on stock. It doing leaps you lose on those as well from time decay. Then option 3 market goes down you lose a lot. Extra on leaps. That Extra leverage for higher returns goes both ways. Leaps will lose value fast.
I sell covered calls but it's not easy to stay in the stock sometimes let alone the narrow margin when you buy a call and then sell a call. I have made thousands and then lost thousands doing this.
Im gonna be honest, the comments section made more sense than the video. If you're teaching this to new people, make it visual and simpler i guess. Otherwise, thanks for the video, at least i know an alternative exists
The problem is, you’re buying a depreciating asset (LEAPS) that could go to zero quite easily. Try showing the same pair of results for a stock that drops 10 points. The LEAP trade might go down 50% or more. I haven’t run the numbers but the risk on the downside is much larger. Extra reward usually comes with extra risk, which it does in this case.
Yes ...this is true and the crux of the issue. Excellent point! Options do not depreciate in a linear move. They could potentially decline in huge gaps based on IV, delta, and all the "greeks", etc. whereas the stock is linear, predictable, and moves on one-for-one dollar for dollar fashion. Doesn't mean one can't use a synthetic call when appropriate. They just have to be aware of the inherent risk, whereas the video seemed to present it as win-win situation.
Is there any way to manage cash secured puts which triggered and the stock dropped significantly so there's no way to sell covered calls at your breakeven for any type of capital?
You can only really close out for a gain/loss or rollout your position in time at the same strike. That's not much management you can really do with CSEPs
If you sell a naked put you also the risk early assignment if the stock declines bigly. You can hedge by buying an OTM put and opening a bull put spread. If the stock starts to decline you can manage this position by opening a bear call spread and creating an iron condor
2 things to consider here; 1) The loss on the assignment in the synthetic covered calls strategy wasn't considered. 20*100*$0.86= $1,720 loss due to assignment of the 105 calls 2) The downside is not being considered; assuming a 10% set risk following the buy point of the XOM shares at $86.06; if owning the shares (covered call strategy) = $8,606 loss if synthetic covered call strategy = delta crashing, premium value loss, $35,320 capital at risk compared to the guaranteed underlying loss of $8606 in the covered call strategy. The downside must always be considered because EV is not one outcome dependent, given this information, which strategy is higher EV long-term?
the real problem with covered call is you will lost money for sure if down weeks/months even they are equal to the up weeks/months during the your trading time, for example: abc stock price at 100, capital = $10000, you sold 1 call for $3 for the first week and price go down to 90, your down to $ 100 + 3 - 10 = 93 * 100, now 2nd week price go back up to $100, your capital : 93 + 3 = $ 96 if the market keep going side way like this your capital will be eaten slowly, the covered call will never work during down / sideway market, it doesn't sound that good giving you income only you are sure the stock will have ( I would say ) out of 100 tradings there can only have 10 down weeks/ 90 up weeks to make up the loss
the explanation is good, understandable..but..all is fine if the market goes your way.. it would be more useful to also tell how to protect/hadge your LEAPS..
How are you deciding which strike to sell? Please mention the deltas, as well as why you're choosing those levels. You're just saying "sell this covered call," but not why you chose it. That way we can replicate the trade in the real market. Thanks
I’m new to investing in general, let alone options, let alone exotic trading. But my “something ain’t right” spidie senses are tingling when I see stuff like this. If I could be making 100% returns every six months, I would become so rich so fast I wouldn’t be making RUclips videos to get people to buy my trading course. It wouldn’t be worth my time.
Obviously no strategy can consistently create a 100% ROI in 6 months. They are simply depicting a good scenario for this particular strategy, which cannot always be replicated. They call it a synthetic covered call, though it's more commonly known as a diagonal bull spread. This strategy only works well if the stock (and likewise the investor) are neutral (stock does not experience a large change in price).
Learn the top 3 trade setups we are using on the desk here: bit.ly/40ceXCu
DOES THIS SOFTWARAE INDICATE WHICH TRADES WILL BE SUCCESSFUL? i KNOW THAT SMB IS ONE OF THE TOP COMPAIES IN nEW yORK! i HAAVE NEVERTRADED AND IS THIS SOFEWARE TELLL YOU WHEN TO GET IN AND GET OUT?
Thanks for this video. Synthetic covered calls can work great in a relatively flat market, but if the long call LEAP option is exercised due to expiring ITM, it would harm your ROI, especially if this happened early in the life cycle of the LEAP. I've found that the ROI can be even higher than using a synthetic CC by using low cost stocks whereby if they are exercised due to being ITM, it's not a problem, it's actually a good thing. If the stock price drops, selling an OTM cash-secured put on the same instrument can either 1. lower the cost basis because of the premium gained if it finishes OTM at expiration or 2. if it finishes ITM, and is exercised, it lowers the cost basis due to averaging down, which sets it up for a new CC.
Thank you very much for not calling this trade a 'synthetic covered call' instead of a 'poor man's covered call,' which is inaccurate. I know Tom Sosnoff (along with 1000s or other traders), and I like him, but he did no one any favors by popularizing that low brow term, in my view.
Sounds good in theory, but make sure you're not in a deep bear market as we've recently experienced. It's a tough, gut wrenching experience when you see your LEAP Options loose 70%, 80%, 90% of their value (and the delta all but disappears), while you're selling synthetic covered calls against them the whole time. The value of the calls sold will not match the loss in the underlying LEAP Option in a vicious bear market. And since no one can predict the future, you may be underwater for a long time. At least when you own the stock, the delta is ALWAYS 100. Lesson: there's no free lunch! Be careful!!!
Damn, right Arthur! Beautifully selected, stylized example if we ever did see one!!
Only some one who's been it would understand the potential downside.
You stated this well.
Agree. This is gold.
Thank you for the reminder.
It's good if you know how to pick your stocks in any market. The problem with this answer is too many people are randomly bullish on random bullshit for no reason. I have been trading for years and so few people understand what makes a stock actually be bullish or have much of anything strategy. He chose Exxon because it was strategically a better bet than most things in the market, most people would execute this strategy and just guess on silly stuff like tech stocks not having any understanding of why tech stocks go up.
Thanks for this amazing information !! If you don't find a means of multiplying money, you will wake up one day to realise that the money you thought you had, has finished. Investment is key, I pray that anyone who reads this will be successful in life
Very true, I started investing before the pandemic and that same year I pulled a profit of about $750k with no prior investing experience, basically all I was doing was seeking guidance from *ROCHELLE DUNGCA-SCHREIBER* who's a guru in the game, you can be passively involved with the aid of a professional.
*ROCHELLE DUNGCA-SCHREIBER* is my portfolio-coach, I found her on Bloomberg where she was featured, I looked up her name on the internet. Fortunately I came across her site and reached out to her, you can verify her yourself.
You’re example is very set up perfectly to fit your strategy. This would look very different if XOM went down in this time instead of up
Not so much since you'd also lose money when holding the underlying. What he's showing is how much you can leverage your position from: selling stock-covered calls > selling syntethic calls > selling synthetic calls with LEAPS.
@@rotierender_lurch
When you lose money owning the stock there are other things he didn’t encounter with option because with stock you don’t have greeks and you don’t have volatility playing with stocks the time in your side and you also get dividends , so managing a trade in a bear market will be easier if you own the stock as you can chase it down by keep selling weekly CC
With leaps it will be very hard and doubling the leaps is doubling the risk
So yea the example is a cherry picked
But for sure we cannot say easily that synthetic CC is better than real ones
All fun and games until the underlying starts to tank. With owning the stock, you at least collect the dividends while waiting for it to go back up (assuming you picked a solid company with good fundamentals). With LEAPS, you lose the premium paid + ability to sell covered calls if the underlying tanks.
I have been watching and learning from a variety of traders, chart technicians, trading mentoring "services" for about two years now. SMB is by far the best resource for the human side of trading. What it takes emotionally and how to build proper habits to become a good trader. As a former high performance athlete, I recognize all of this as essential to success in a difficult environment. Your approach is refreshing and most appreciated. Please keep up the good work
With any investment, the risk is more important than the return. Would be great if you could quantify the relative risk of those 2 strategies.
Exposure of the synthetic is less but the overall risk is an order of magnitude higher. I have simulated leap calls using Monte Carlo sim to quantify relative risk before I ultimately decided not to do them. They are good for small positions where you may not want a lot of exposure, but they can easily take your shirt in larger positions.
With selling covered calls there is no additional risk other than just owning the shares. The "risk" is an opportunity cost of not making as much, but the chance of dollars leaving your account are 0%.
This works great if the stock goes up. But what happens if the stock goes down? Your leap calls will be worth much less , potentially losing a lot of your initial investment and wiping out your income from premiums if not getting you into a loss. I'd expect you mention the risks with the gains...
Yeah no free lunch. You want big short term returns you take big risks. Framing this as a viable alternative to CCs is idiotic
The idea is to buy it far enough out.... Plus if you own the stock and the price drops, you'll be down all that money on the stock as well. You could instead of buying 10 or 20 contracts, buy 1 or 2 or 3 DITM and then, you still lose less if it goes down and you can keep selling more calls while waiting for the LEAP or the stock to rebound.... If you buy it because you think the stock will go back up, then that's why you buy the LEAP as well.... Once it gets closer, roll it on out -- pay a litttle more.... but roll it out and extend its life.
Buy about a 90 delta strike on your long call with the PMCC. Much lower risk.
And use the farthest out dated long calls on indexes like SPY or QQQ . XOM could crash and never recover. Pretty sure SPY and QQQ will recover. No history of them not recovering. But we do know individual stocks/companies can crash to zero. So I say XOM and his delta used are poor examples of prudent risk taking. Oh, and lots of distracting advertisements throughout this video.
@@torchy187 +1
Basically this is a leveraged play. When the market corrects you need extra cash to buy and hold the shares else you will lose everything. I wish you also explain the risks on the bear side
You can roll the LEAPS to a longer date so you never have to exercise them (= less capital needed).
Great video. I have been practicing both the covered call and diagonal, as this strategy is also called, a bit and found my biggest question is, what is the best way to pick the underlying stock for this strategy? You don't want it to go down too far and don't want it to go up too fast. I'd love to see how the stock is picked. Thank you!
If you don't want the stock to fluctuate too much, look for ones that have low beta.
i KNOW A LOT OF BIG COMPANIES USE STOP LOSS FEATURES. oNE COMPANY SAID THEY USE STOPLOSS ON EVERY TRADE.
@@bbb_888 True but low beta stocks have low option premium. You have to accept little premium income or sell closer to the money options with higher chance of going in the money. There is no free lunch.
I like doing covered calls on stocks like UL and GSK. Stocks that really go no where but pay a good dividend. 1/3 of my portfolio is for income.
I HATE DIET PEPSI AND I HATE PEPSI, PERIOD,. I LOVE COKE, NO I AM ADDICTED TO IT. MORE THAN JUST COKE!
Of course these hypothetical examples are hand-picked for demonstration. But that being understood, I have questions also about the selection of the strike price. Looking at that chart, it was demonstrably higher option price than strikes both above and below. The other area I’d be curious to see more information on is how to secure execution since slippage, liquidity, and timing seem critical. I’ve used multiple retail brokers, and options seem to be tricky to get approved, especially if they’re combo or complex options. What tools or brokers can you recommend on a scale of useful/reliable to difficult/complex? Thanks for the excellent video and idea, though!
The options you buy you want to be deep in the money (DITM), the options you sell you typically want to have at least a .30 delta, technical analysis is also needed and the underlying stock and it's volatility should be taken into account. As far as retail brokers, interactive brokers is supposed to be good but I don't have much experience, the thing taken into account most is funds available. You should have 3x the margin needed to cover max loss. So the amount of cash you have in your account is the biggest factor, then experience. I assume the experience they want you to have is "buying" options as the max you can lose is the premium you pay.
Just watched Tasty Trade video on this. They bought .70 delta and sold .30 delta
What delta do you sell the call each month. What delta do you buy the leap at and is it itm, atm money or otm?
Great content. Please please, do a video on the cost of carry of this trade, and also how to manage depending on different situations, for example what if the underlying rallies in either direction. What if it goes down a bit. Etc
That's when you sign up and pay for the lesson
With markets tumbling, inflation soaring, the Fed imposing large interest-rate hike, while treasury yields are rising rapidly-which means more red ink for portfolios this quarter. How can I profit from the current volatile market, I'm still at a crossroads deciding if to liquidate my $125k bond/stocck portfolio.
The market is volatile at this time, hence i will suggest you get yourself a financial-advisor that can provide you with entry and exit points on the shares/ETF you focus on.
very true, I started investing before the pandemic and that same year I pulled a profit of about $600k with no prior investing experience, basically all I was doing was seeking guidance to make a from a financial-advisorr, you can be passively involved with the aid of a professional.
Please can you leave the info of your investment advisor here? I’m in dire need for one.
VALERIE JEAN ZWOSTA
That’s my licesed Financial advisor you can easily look her up, Thank me later!
Thanks, I merely looked her up on Google and was highly impressed by her credentials; I got in touch with her because I need all the help I can get. I just set up phone call.
I'm trying to figure out the overall SMB Capital strategy with these videos that go into good detail but lack the most important part, even a mention of the downside, the strategy to exit if the trade goes wrong. It would be complete if they would give their conditions on cutting losses; delta on the long CALL, or something like that. They should beef up their videos overall.
Another great video by Seth!
The real risk is if it drops below your LEAP purchase price.
A LEAP expires so that would be a loss. Stock doesn't expire so it can go back up again and you can continue to write calls against it.
It's true you lose less at that time frame with LEAP strategy so less risk. Pricing of the LEAP and the CALLs will be important along with the management of them.
So, still risk. Morale of the story, don't put all your money/eggs in one basket. Make one stock a strategy with a part of your portfolio, not all of your portfolio. No matter how good the strategy is there is still risk. Example: The bank stocks look great for this right now! BUT you would be amazed at how far they can decide to drop and could even go under! Be careful!
How do you choose the strike price for the leap call?
My question too
@@mshparber Most people use an ~80 Delta.
Stock price was 86, and he bought LEAP 75 Call. My assumption is 75 is a key support?
@@mshparber Delta
@@cedarmanagement2343 No, Delta
Have a question please. I understand buying a LEAP option 365 days out deep ITM 1 contract. But to sell a covered call OTM for a 30 day expiry on the same stock (synthetic covered call) don’t you have to own the 100 shares first?
No he’s basically selling naked calls is the second scenario. That’s why it’s referred to as “synthetic” cause it’s not a true covered call. In fact, it’s not covered at all
You said you understood buying the LEAP option, then you asked a question that showed you didn't.
@@markbloyd9852 get back in your box please! Learn to speak when you are spoken too. Have a great day! Just cause your mother said your important doesn’t mean you truely are! She had to say it…
The “quadruple” return is from doubling the risk. Poor man covered calls are for the impatient investors. This mentality often results in investing in stocks you know little about and you will end up holding the bag when they drop 30-40% and your leap goes out of the money and its delta drops to 0.4
Well, what exactly of the mechanics of this trade? What delta of LEAP your are purchasing and the delta near term you are selling? When do you get out? I supposed this would work if the stocks in uptrend but if down trend continues would be painful! And what type of stocks would work with this strategy? High beta stocks may be too volatile for this especially if it goes in the opposite direction.
Don’t forget the dividend. It makes the stock ownership case look a little better. But it also complicates position management if you sell ITM calls.
The calls are discounted for the dividend -- you confirm that you're not overpaying
you can collect monthly rent .. but at the end the "rental Property" ( the stock) will be condemned.. if the market drops. Then you lick your wounds and repeat...
Investing in alternative income streams that are independent of the government should be the top priority for everyone right now. especially given the global economic crisis we are currently experiencing. A variety of stocks and digital currencies are still attractive investments right now. In just 5 months my portfolio grew by $300k in gross profit, the main thing is to diversify your portfolio and you will see amazing results by investing smartly.
Surely these are desperate times, but in my opinion, there is no market condition that a good investment advisor cannot ride through, especially those that have existed since the 2008 crisis and before.
I agree, I was on the sideline for awhile observing, trying to figure out the best time to get in, that was before I came by a CFP, commended by a pundit on Reddit, reluctant at first but I went ahead and got in touch with the CFP, long story short, it's been 3years and counting and I've made over 1.5million dollars simply by following her guidance. I took a vacation to Bahamas this summer just to reward myself a little for the consistency lol. GREAT SUCCESS!!!!!
@@Americanpatriot723 Mind if I ask you to recommend how to reach this particular CFP you using their service? Seems you've figured it all out unlike the rest of us.
@@Suntz_u "LISA ELLEN SHAW" is her name. I initially came across her on a CNBC report then on an investment newsletter and at once searched her on the internet, best decision I've made to stay afloat these crazy times. She has been exemplary.
@@Americanpatriot723 I am going to look her up too, I have about $81k i want to start with, might be small but it's better than nothing though. Since the 08 crash is playing out again.
Thanks for this video - I've been selling covered calls for awhile now and haven't heard of this but its genius. One thing you didn't mention was that owning the shares will return a dividend (in XOM's case, it returns 3.21% annually) and if you time it right you would have collected it twice which would have been roughly $1,800 in that time period. Also curious how you feel about selling a cash secured put after the option is assigned and you are forced to sell the shares rather than buying the shares back and selling the calls on them.
depending on the ex-div date maybe not twice, but definitely once. Timed out to 7 months and likely twice if approached properly yah
It's a cool options trading strategy but carries substantially more risk in a bear market than a CC strategy. Be careful implementing with too large of share of your portfolio
EDIT: I am referring to the PMCC (poor man's covered call) strategy in the video carrying more risk than a standard covered call. As noted below, the cash-secured put and the covered call have the same risk profile at open.
@@beanwithbaconmegarocket That's incorrect. Covered Calls and Cash secured puts have the exact same risk profiles. They are essentially the exact same trade.
@@justinpliskowski153 you're exactly correct about CC and Cash-secured puts. But in my original comment I was referring to the Poor Man's Covered Call strategy in the video being different that a CC.
@@justinpliskowski153 Not the EXACT same trade, because you can lower your collateral at risk with a cash secured put by rolling an in the money strike down, one strike at a time, and out to a further expiration, for a net credit. You get PAID to lower your collateral at risk.
With a covered call, you CAN roll the out of the money call strike down, to earn more premium, BUT you can't lower your collateral at risk, because you own the shares, that are losing value, as the share price drops.
On the bright side, you do get the dividends while owning the falling shares. LOL
In the last example you had to buy back the call at a loss. You better hope the leap call is worth enough to offset the cost of the buyback. I think I would buy the 20 leaps but sell 10 calls just in case there is a run up on the price. This way half your leaps keep appreciating and your loss is cut to half when buying back the covered calls
How is a LEAP cheaper than the sold option?
@@rotierender_lurchHeh, word... A lower-strike LEAP will always be more expensive, by design.
What about setting your covered calls for end of week, vs end of month expiration? And I say that because I would have a fear, that at SOME point within 30 days, it would be more likely that the stock with hit or surpass the strike price, vs within one week.
This can also be viewed as a long dated calendar spread campaign. While the potential returns are good, it is not less risky than actually owning the stock even if the initial cash outlay is lower. Due to adverse price changes and time decay your losses can potentially be much more than owning the stock.
Isn’t it really a diagonal because the Short calls that are sold for income are nearer dated than the long leap calls bought? But your point is still correct I believe. I also agree with some other comments that the strategy does not work - not only is it less profitable it’s actually a loser if the underlying falls in value significantly. And even if it dies not fall much, time decay on the leaps may quickly eat up the overall profits. With options it’s always rhe same, there are trade offs. Btw this strategy is also sometimes called a poor man’s covered call. It has benefits but as others note, it is way more risky if the underlying fails. Feel that Seth should have noted this. He clearly knows it
@@stevesyoutubechannel1433 Very close Steve... It's a diagonal yes but not because of what you said. It's diagonal because the strike prices are different for the two positions. Calendar Spread are the same strike at different dates. Great intuition tho! There is definitely a great deal of risk in this strategy yes, you're relying on a leap option maintaining value on a very forward future outlook. If that fails, which it absolutely can, you're in a very awky position.
@@DeviantFox That last bit you said is really the crux of it. They've constructed this video as if the strategy is a simple variation on the covered call and didn't bother to outline the risk. Any strategy looks good when you backtest a stock that moved in your favor.
They're just trying to rope option newbies into using their services. Because experienced options traders already know all this. But if they properly explained the downside risks, the novice options trader who gets small returns on CCs would not be interested. Very shady imo.
Game changer! 2 quick questions though boss: 1) what delta should I be looking to sell? I heard like .2 was a good place to start. And 2) if it dips below the far out call, is that an immediate sell and exit? Thanks!
Love the Video and Thank you for taking the time to make this. One question and most likely missing something. Would you be able to save a little on that one loss in the synthetic deal by just buying the stock on expiration date at 105.86 or even slightly lower. Then letting the options assign at the 105. This would make an 0.86 x 2000 = 1720 loss instead of the 0.98 x 20 contracts (2000 shares) = 1960 loss. I know you would have to use more capital to do this, but you would be getting it back when the contracts assign and it would be back in the account to trade again on Monday morning. I also understand that the synthetic way in the video is best with limited funds. Again, thank you for taking the time to share this and happy trading.
The problem is that the numbers in the slide have nothing to do with what he is saying.
great video! been doing this since last year (puts and calls) and it does work...just watch your greeks...dont wanna get ran over. Also, take profits while you can...(roll them leaps upwards)
It's a diagonal. There's a lot of "Vega" exposure in that (plus rate exposure, etc)
Covered Call vs Poor Man's Cover Call is not a "simple tweak"
There is a fundamental risk level in buying a LEAP vs buying Stock - which you didn't even mention.
LOL
Yeah the title was clickbait for sure. "simple tweak"? Lmao it caries more fundamental risk than a CC but they act like it's almost the same thing
what is the required option approval level, if i want to write call options against Leaps?
Question---why buy he LEAP option in the first place? How does it protect you?
I think it allows you to start selling Calls
I keeps you from having to come up with the full amount of either owning the shares and having covered calls that way, or keeping the funds available in your account the entire time. Your broker isn't going to let you just sell options without having them covered in some way.
So what about the risk on both trades? max loss vs gain etc?
A stock that went up 21% in 6 months in hindsight you can make a lot of money in a lot of different ways. In a sideways moving market the likes of which we have been CC strategies look attractive but in the long run they underperform Long only strategy. Many studies have shown that. Seth please make a honest video about where u show examples where u wrote a covered call on stock that fell sharpely snd not recovering for years.Please discuss how to pick the right stock for such strategy and how to handle it if the stock drops significantly.
Nice return, but very little downside protection if the underlying plunges.
A better way would be to create a DITM debit spread using leaps and neutralising the max possible loss through near month otm credit spreads. Once that's done, keep on selling otm credit spreads and collect profits.
This ofcourse is contingent on the leaps having enough liquidity, which most of the time is a pita.
interesting. so youre saying, instead of a ditm call option use a ditm debit spread, and instead of short calls use otm credit spreads. i've never thought about doing this. what it lacks in relative profitability, it makes up for in increased hedge. i guess you could always increase your size if you wanted to...
@@vinnyvidivici5930 You can definitely scale it so far there's enough liquidity. SPX and any other European style option works absolutely good with it.
To refine on what I said, this strategy is directly influenced by pmcc. Though it doesn't have the usual drawbacks of a pmcc, some of which may include stuff like a wide bid-ask spread on the debit legs.
I place the debit spread 2 years out. By the 6th/7th month, I can recover the entire risk on it. That leaves me about 1.5 years of a no risk zone.
1 thing to keep in mind is not to place the credit spreads too near-the money. A general rule of thumb that I use is that if the distance in-between the legs of the debit spread is 1 standard deviation, place the credit spreads 3 standard deviations from spot. That way, you'll weather the huge bid-ask spreads on the debit spread.
Thanks Doug. Happy Anniversary
Thanks Good video. I'm still a gun shy about synthetic options but appreciate the education
I did dip my toes in the selling covered call options but didn't graduate to the synthetic options...yet. What I did "learn" is getting comfortable with the process of selling covered calls. However, what I'm wondering is about the shares being assigned once the price reaches the strike price. During one of my session, the stock did go above the strike price of the option, so I assumed my shares would be assigned. I checked and the shares were not assigned. A week later, the option expired and I still have the shares. On the date of expiration, the share price was below the strike price. Based on this video and from others, I thought once the share price exceeds the strike price, the shares are immediately assigned away.
What happens if the stock price goes above your strike price before expiration. Do your shares automatically get filled?
They do not automatically get filled, but could be exercised anytime but normally get filled at end of market day on expiration.
You forgot to mention that a "Synthetic Covered Call" is also and arguably more commonly known as a "Poor-Man's Covered Call." Your video here for instance is the first time I've heard it referred to as a Synthetic Covered Call for example.
Does this trade require spreads? Or is this two individual trades? Can I do this inside of my ira?
11:29. What happened with the USD 1,440 CF you collected; not shown
Question. I'm in a stock at 26.40. It's at 34. I can write a covered call and pick up 1.1 premium for a 40 strike for November 16. Not married to the stock. I calculate this is about a 4% return if it gets called away or about 16% annualized. Is my math right here?
Can you help me find the video where you discussed selling SPX calls for monthly income? It could have been selling puts. Im not sure. The one thing i remember is Seth mentioned Warren Buffet.
Am I messing something in the math at the end? The description says you sold 10 calls but the calculation is for 20 calls.
In the first method they bought 1000 shares of the stock and sold ten calls.
In the second method they bought 20 LEAPS and sold 20 calls.
@@awalton9024 that's right. their slide has a typo in it, i think.
On the synthetic call on the 20 97 calls yiu sell. , you will need 194 k in your account to do the trade ?
yes but that stock needs to be in a solid uptrend. how do you find/recognize those stocks before you get too old in the move up?
Reading some of the comments, a lot of people are saying what is being explained here is "investing". It IS NOT! It is trading. It is speculative activity. Owning and holding a stock, because you like the company and feel it will grow in the future is investing. Running options strategies of any kind is trading. Please don't mix them up.
What happens in a synthetic covered call, the near term calls get into the money or are being called? How is the trade settled?
Depends on your broker. Afaik they take the cash from your account to cover all costs. You'll get a notice (margin call) if that's not possible, then you have to decide (provide funds, sell stocks, ...). Most brokers let you close your trade in one go. So you exercise your option and hand the stocks over to the other guy you owe. All in one step and no extra funds needed.
What happens if you get assigned and you just have the leaps? What would you do?
Exercise your options. In this case, by exercising his options he would have been buying the stock at $75 ea, at a cost of $17 ea (his initial purchase of the options) his breakeven is $92. If the options he sold were exercised at $97, he would make a $5 profit. Multiply that by 100 per contract, in this case he had 20 contracts so multiply that by 2,000 and that is the P&L, $10,000 profit. That's why you want to buy the leaps deep in the money (DITM) and choose a stock that will either go up or at least stay above your breakeven point. Since you collect premium every month, your cost basis and breakeven point will go down, that's why it's important to keep track of your P&L.
@@fredmarzillier750 please don't exercise the call unless the option has about zero extrinsic left (which will not be until closer to expiration or maybe a little sooner if a dividend)
You can re establish the position after call assignment by buying a new covered call:
+100 shares
-1 call
This will replace both the shares that sold and the short call position
Obviously be careful with this video's proposed strategy since you could end up short shares and that can be very expensive or prohibited in some accounts.
Not substantially less risk lol. You have theta decay and that premium on LEAP will get sucked out dry if stock drops 20-30%
More reward, always more risk. A little misleading to call this a "less risky" strategy than covered calls. Your max loss is technically less, yes, but you need the stock price to rise during the duration deep ITM long call, otherwise if it remains even or goes down or even if it only rises slightly towards the expiration date, you will lose big. You have to be really, really good at fundamental analysis and pick a deeply undervalued stock near the bottom for this to be worth it, in my opinion. I will only do this on a few small picks every year. Real covered calls have better risk/reward for most people in most situations, I think.
I will be forever grateful to you, you changed my entire life and I will continue to preach on your behalf for the whole world to hear you saved me from huge financial debt with just a small investment, thank you Veronica Hoy.
Wow. I'm a bit perplexed seeing her been mentioned here also Didn’t know she has been good to so many people too this is wonderful, I'm in my fifth trade with her and it has been super.
She is my family's personal Broker and also a personal Broker to many families in the United states, she is a licensed broker and a FINRA AGENT in the United States.
You trade with Veronica Hoy too? Wow that woman has been a blessing to me and my family.
I'm new at this, please how can I reach her?
I was skeptical at first till I decided to try. Its huge returns is awesome. I can't say much
Curious about the LEAPS what are they and why this approach ?
Equity options with at least 1 year until expiration.
They are primarily using the long call to get exposure to share price movement but essentially through borrowing (you buy the call and the other side typically buys the stock, so the call premium includes an extra fee/carrying cost for the capital you are not spending today on the shares)
Question: I sell to open a SOFI option @$7 with expiration date of 2026, think it was doing a LEAP call option. SOFI is well over $10. How should I close this long term cash secure put without looking money cause the stock is already up.
So we are just ignoring the huge risk of a bearish move?
Yes, but if you're considering the covered call, you're already bullish.
What they don't cover is volatility, rate exposure, dividends, etc, which cause calls to differ from stock
@@OurNewestMember you’re also failing to account that somebody is holding the stock regardless of the level at that versus a covered call technically could be worthless if it just bought with leaps one you hold the actual stock and it could be down a large amount but the leaps might literally be worth 5% of what you bought them for a very bad period even deep in the money leaps can go out of the money and bad scenarios
@@ssing7113 yeah I said "what they don't cover is volatility"
The stock falling so much that the LEAPS is worth 5% or zero would in fact fall under the category of "volatility"
If you are long downside volatility, this works out for you (less loss than holding shares, although you shouldn't be so long Delta in the first place), but if you are not long volatility, then the long call will waste your money on unneeded volatility premium
but the part that is missing is that when you buy a naked call leap, brokerages firms also locks up around $150,000 to buy a naked leap call $75 x 20 x 100 = $150,000 + $35,320 (cost of the leap)
The broker will "keep" the $1766 premium paid per call for margin purposes -- so ~$35k for 20 contacts
Thanks for this great Video, I am an Option (Income) seller, and I enjoy this kind of videos. One thing I did not get from you is at what Delta are you buying the long Leap ands selling the Covered Call. I appreciate your reply. Thanks
Generally in this strategy you'd do the opposite extreme of the expected move over that timeframe. So in this case of a covered call you'd do the lower end of the expected move.
I'm new to stock market /Crypto and would like to invest but I've go no idea on how to make good profits. Pls what's the best approach you'd recommend?
Exactly, at the moment bitcoin is the best and profitable coin to buy and invest in..
This works on a relatively stable stock. However, the problem I personally experienced is when the stock drops like a rock, for whatever reason, and then snaps back up quickly. Buy stock for $100 but it drops to $80. Your covered call is at $85 but stock rallies to $90. Capital loss ensues, unless you buy back call option and extend the time frame. No one has a solution on how to remedy this scenario. I guess if they did, they would be rich.
I have experienced this also, I'm curious to learn the best way to pick the stock for this strategy
A leap Buy ITM Call or Put can be disastrous if in OTM. premium from ATM OTM offsets partly.
is this strategy suitable for downward or stagnant trending stocks?
I actually already knew about synthetic positions! But normally they give you 100 or so delta, I hadn't considered doing a 2:1 position for the purposes of writing calls against it. Neat idea.
The only way to get an options position with a 100% delta is by buying a call and selling a put.
@@FlyingSagittarius I've found it depends on the strike and expiry, to a small degree. I've seen an ATM leaps synth future with 102 delta, for example (but that's splitting hairs). I think you can also get a deep ITM put or call and that'll usually have 98, 99 delta as well (but often no volume or huge bid/ask spread)
whats the average delta the covered calls were sold at above the strike price?
What are the flaws to this synthetic strategy? a downwards trending stock? When should you close the leap calls and would it be safer to purchase a 2y leap call instead?
@SMB Capital, i have 2 questions:
1 Does the option price have an impact on the strategy you have just developed?
2 How can I exercise an option before expiration
1. The premium or option price ALWAYS matters in every strategy, as well as the bid/ask spread (i.e. how much potential profit you'll might lose in execution). For this in particular, the idea is to collect enough premium at the end of the expected move to avoid assignment and justify the risk to the downside if the market bears.
2. You almost never want to exercise an option, especially in a covered call scenario. You want to exit position to close prior just prior to expiration UNLESS you're wanting assignment of those shares. You can use an option to reduce your cost basis in that case.
@@DeviantFox thanks for the answer, could you explain me more, for the first question, does it mean, if i set a strategy, for example in the case if the price goes above the strike price my profit will be 10$, and at maturity the price is above the strike price, did my profit = 10$ or it will depend on the price of the options taken in the position ?
2) To exercise an option, you call your broker and tell him you want to be a donkey, by exercising the option.
Like the other poster said, it is rarely a good idea to exercise your long option.
Why? Because you lose the EXTRINSIC (time) value of the option when you exercise it.
You make MORE money by SELLING your option in the open market, rather than exercising it.
If you really meant to ask, how do I CLOSE my short option, before expiration, then you do that by placing a 'buy to close' trade order.
@@thomasd5488 thanks ;)
Am I missing something or is this just an overly complex explanation of a Poor Man's Covered Call?
The margin of buying a synthetic long dates ITM call is as much as buying the underlying stock. Would this significantly lower the return of this strategy?
Synthetic long is not the same as a long call.
The synthetic long spread will tie up more margin/risk (than the long call) but has a higher expected value because you are selling off the volatility exposure (downside protection). So they are a trade off.
If you have risk-based margin, the synthetic will have a similar margin requirement as shares but not require as much cash capital, so it doesn't provide notional leverage, but it would provide borrowing leverage at a predetermined rate (eg, maybe it is cheaper for you to "borrow" capital from options markets than to take a margin loan from your broker for the cash to buy an equivalent number of shares)
Essentially the difference in expected value of the long call versus synthetic long is primarily due to volatility and leverage needs.
If you expect high volatility (especially to the downside), then the long call will have an advantage.
But if there's not enough volatility for you to capitalize on, then the long call would likely perform worse
Other factors like interest rate volatility will affect the positions differently, too
mike i missed you at toronto money show. your great
When doing Covered Call, how did you select the strike to sell? is it based on 1 STD?
To me, it depends on the IV and volatility of the underlying. One idea I like it so look at the cost of an ATM strangle; the breakevens here will tell you where the market is forecasting the price to move by expiry (this represents the optimal risk/reward, as I understand it). Of course, it can still be incorrect, but you can gauge the market sentiment and price your position accordingly.
If you're avoiding assignment you'd want to be at the best premium gain for the expected move. Sometimes this is exactly where the expected move extrema is, others it's just 1 strike inside (or more). Your thesis also has some bearing on this too. As you get closer to ITM your premium gain is higher so if you're more bearish on the underlying you can go closer to the ITM strike.
And what do you do when the long position continues to.move down, so that the premium for selling calls doesn't cover delta loss ??
sell the stock immedialtely, cut the losses!
I would like to understand why you used the ITM leap instead of an OTM leap?
You shouldn't sell covered calls at a strike price less than your cost basis because if you get assigned you lose money on the LEAPS. OTM LEAPS are above the strike price by definition, and when you add the premium paid for the call, your total cost basis on the LEAPS is likely well above the current market price. When you buy ITM LEAPS your cost basis is likely to be closer to the current price - as a general rule, the deeper in the money you are, the lower your overall cost basis when you add the premium you paid for the call plus the strike price at expiration. You'll need more capital to start, but you're less likely to lose money if you get assigned.
This campaign works becase the price of the stock fluctuations where from $84 to $104 in 6 months , so the success in this case is when the stock is really stable
Thank you for the great idea of using synthetic covered calls. i never knew about these yet!
COOL!
I heard it called in out spread also?
thank you SMB!!!!!!!!!!!!
Syn CCs carry substantially more downside risk than a covered call. They should have explained this. If you own Exxon and the oil market falls out, you may have to weather a year or so of holding a stock with negative P&L, but at least you still own shares of a solid company. If you're running a synthetic CC strategy, you could go bust. It's a fine method of options trading, but understanding downside risk and position sizing is key. These guys are not good teachers because they didn't explain either one. They also didn't explain how to manage this position when it moves against you.
@@beanwithbaconmegarocket One observation I've made about SMB, their videos are actually infomercials, designed to lure you into buying their trading courses. IMHO
It is in those trading courses where they go into full detail about all the risks.
@@thomasd5488 Yeah, I'm sure that's true. I just don't like that style of "education" videos. If they want to lure people more honestly they should frame it as, "Now these trades are way more profitable but come with more inherent risk. To overcome these risks, subscribe to our service and get the assistence of seasoned veterans."
I have found it works best with leaps and you can sell naked short term calls and collect div on covered stock if you want to add extra risk. Which often does not work as good as just leaving it and letting the other side of the trade take the deep ITM calls/stock you sold months ago. You can't really break above 10%-12% return on the year but it is very high chance trade that can be added too high risk trades to soften the bearish blow and keep avg prices low. You can even stagger the ITM calls and not just take them all at one strike.
Is it better to just let them expire or Buy to Close? I'm surprised this wasn't touched on because I suspect it's a common question.
If my 100 shares cost $5 each and currently the stock price is $4. Do I have to buy covered call above $5 or above $4?
You'd be wise to sell above $5 so if they get called away you don't have a net loss.
Well it's a good bulish trade, and example was bulish so it all worked out. Option 2 market just goes sideways. Make a little on call premium flat on stock. It doing leaps you lose on those as well from time decay. Then option 3 market goes down you lose a lot. Extra on leaps. That Extra leverage for higher returns goes both ways. Leaps will lose value fast.
I sell covered calls but it's not easy to stay in the stock sometimes let alone the narrow margin when you buy a call and then sell a call. I have made thousands and then lost thousands doing this.
Excellent Commentary!!!!! Priceless!!!! Thank You!!!
What are the risks of the synthetic covered call strategy?
Im gonna be honest, the comments section made more sense than the video. If you're teaching this to new people, make it visual and simpler i guess. Otherwise, thanks for the video, at least i know an alternative exists
What happened if the stocks or underlying go down
The problem is, you’re buying a depreciating asset (LEAPS) that could go to zero quite easily.
Try showing the same pair of results for a stock that drops 10 points. The LEAP trade might go down 50% or more. I haven’t run the numbers but the risk on the downside is much larger. Extra reward usually comes with extra risk, which it does in this case.
Yes ...this is true and the crux of the issue. Excellent point! Options do not depreciate in a linear move. They could potentially decline in huge gaps based on IV, delta, and all the "greeks", etc. whereas the stock is linear, predictable, and moves on one-for-one dollar for dollar fashion. Doesn't mean one can't use a synthetic call when appropriate. They just have to be aware of the inherent risk, whereas the video seemed to present it as win-win situation.
Why wouldn't you roll your calls for a net credit vs. buying back the call options.
Спасибо, всё работает. Ждём новых связок.
You, my friend, need to make sure your viewers are aware of the dangers of a synthetic-covered call.
Is there any way to manage cash secured puts which triggered and the stock dropped significantly so there's no way to sell covered calls at your breakeven for any type of capital?
You can only really close out for a gain/loss or rollout your position in time at the same strike. That's not much management you can really do with CSEPs
If you sell a naked put you also the risk early assignment if the stock declines bigly. You can hedge by buying an OTM put and opening a bull put spread. If the stock starts to decline you can manage this position by opening a bear call spread and creating an iron condor
2 things to consider here;
1) The loss on the assignment in the synthetic covered calls strategy wasn't considered.
20*100*$0.86= $1,720 loss due to assignment of the 105 calls
2) The downside is not being considered;
assuming a 10% set risk following the buy point of the XOM shares at $86.06;
if owning the shares (covered call strategy) = $8,606 loss
if synthetic covered call strategy = delta crashing, premium value loss, $35,320 capital at risk compared to the guaranteed underlying loss of $8606 in the covered call strategy.
The downside must always be considered because EV is not one outcome dependent, given this information, which strategy is higher EV long-term?
the real problem with covered call is you will lost money for sure if down weeks/months even they are equal to the up weeks/months during the your trading time, for example: abc stock price at 100, capital = $10000, you sold 1 call for $3 for the first week and price go down to 90, your down to $ 100 + 3 - 10 = 93 * 100, now 2nd week price go back up to $100, your capital : 93 + 3 = $ 96
if the market keep going side way like this your capital will be eaten slowly, the covered call will never work during down / sideway market, it doesn't sound that good giving you income only you are sure the stock will have ( I would say ) out of 100 tradings there can only have 10 down weeks/ 90 up weeks to make up the loss
the explanation is good, understandable..but..all is fine if the market goes your way.. it would be more useful to also tell how to protect/hadge your LEAPS..
Margot Robbie taught me that anything starting with the word 'synthetic' is risky as f***
I live in the Netherlands, can i trade in USA using SMB Capital?
How are you deciding which strike to sell? Please mention the deltas, as well as why you're choosing those levels. You're just saying "sell this covered call," but not why you chose it. That way we can replicate the trade in the real market. Thanks
I liked the strategy. We will work. Thanks for the review!
Also known as a PMCC, works great in neutral bull markets but not so well in bear markets
I’m new to investing in general, let alone options, let alone exotic trading.
But my “something ain’t right” spidie senses are tingling when I see stuff like this.
If I could be making 100% returns every six months, I would become so rich so fast I wouldn’t be making RUclips videos to get people to buy my trading course. It wouldn’t be worth my time.
Obviously no strategy can consistently create a 100% ROI in 6 months. They are simply depicting a good scenario for this particular strategy, which cannot always be replicated. They call it a synthetic covered call, though it's more commonly known as a diagonal bull spread. This strategy only works well if the stock (and likewise the investor) are neutral (stock does not experience a large change in price).