If you’ve been following my Option Trading Journey, you know that I’m trying to supplement my income with frequent option trades.
As a newbie options trader, I’m trying to keep my strategy simple and as low-risk as options can be, by only selling Covered Calls and Cash Secured Puts. And, if you happen to be a newbie like me who is looking to earn extra income through options trading, I recommend you start with these two trades as well.
My Covered Call A Ha Moment
One of my recent Covered Call trades provided a “Masters Degree of Trading’ education on the best way to mitigate your risk, with regard to Options trading.
It has literally reprogrammed my thought process, because it taught me how to focus on hitting singles and doubles, rather than ‘swinging for the fences’, when it comes to making money through Covered Call trades.
Monday morning March 27th, I entered a trade to sell one covered call contract of Qualcomm (QCOM) with a strike price of $134 which expired on April 28th, 2023.
In case you’re new to options, this means, if the price of QCOM were to hit $134 on or before April 28th, I would have to surrender 100 shares at a price of $134 per share. This would be an 8.9% move to the upside in 4 weeks which I’d be tickled with.
But, I learned something more important in the process!
Selling Covered Calls means you MUST own 100 shares of the stock.
First off, the term ‘Covered’ means you own the shares and are putting them up as collateral to execute the trade. It’s important as a new trader to have the underlying shares in your account so you can avoid using leverage, until you really have a grasp of the process.
By taking this trade on, I was instantly paid a premium of $252.48.
Why I chose to execute a Covered Call Trade on QCOM
QCOM was in a downward trend, and my Support and Resistance Analysis led me to believe it would stay in this pattern for some time. I figured there was about a 70% chance it would not hit the price of $134 by April 28th.
And, if it didn’t, the $252,48 was mine to keep.
The importance of managing your Option positions.
My Aha moment came when I realized I didn’t need to wait until April 28th to get out of this trade. Sure, I wouldn’t get to keep all of the $252.48, but I could have kept a portion of it.
What I’m getting at here is, if you sell a Covered Call Option Contract, with an expiration date of 3 months from now, you don’t have to wait 3 months to exit this contract.
Why would you want to do this?
I’m glad you asked…
Because, the price of the option contract moves with the market price of the underlying asset. You may sell a contract with 90 days until expiration, but the very next day the contract may be favorable to you and allow you to close it while still generating a decent profit.
This very scenario happened to me this week with my QCOM trade.
To Close Options Trades, do the opposite you did to open it.
My initial order was to Sell 1 contract to ‘Open’ the trade. (Sell to Open)
As the day went on, the trading price of QCOM dropped, which resulted in the cost to close the option contract to drop as well.
The trade looked like this:
Sell to Open ‘Premium’ earned $252.48 Buy to Close ‘Cost’ ($150.51) All contracts closed, profit, $101.97.
So, after 24 hours, I was closed out of both contracts with $101.97 stuffed in my pockets, and I was ready to place another trade.
But, beware Covered Call Trades can bite you when you least expect it.
Trades don’t always go in your favor, so you have to be ready with a good backup plan.
Case in point….It’s was entirely possible that the share price of QCOM could have gone up, which means the option price would have followed suit. Sure, I’d have gotten the initial $252.48 in premium, but the cost to close the trade could have risen to $300, $400, or more.
So, closing the trade may not always be your best option.
Which is why you need a back up plan, such as exercising patience and waiting it out. In my case, I could have chosen to wait it out until April 28th, and hope the price didn’t close at or above $134.
AND, if it never closes above $134, I keep the $252.48 in premium, along with my 100 QCOM shares, and the option expires worthless.
If it did close at or above $134, I would have kept the premium, but I would have had to sell my shares for $134 each, (even if the market price was $140 per share) or a total of $13,400.
If that happens you simply move on to another option position, cash out, change investments or take the family on a month long trip to Panama, like my friend Jim did.
Key Takeaways
Covered Call Trades can be profitable if you have the right mindset. Think singles, and occasionally a ‘stand up double’. Forget about Home Runs; in the ‘options trading world’ expecting home runs is a fools game.
Covered Call trading is not a ‘No Money Down’ Game
You must have operating capital to place Covered Calls, and Cash-Secured Puts for that matter. These types of trades are generally for accounts with at least $5000 in them. If you’re looking at trading options with little to no operating capital, I would recommend trading Credit Spreads.
My intention with my options trading journey is to continue with singles, maybe some doubles and learn as much as I can about options so I can share my knowledge. I hope to one day be able to make a full time living as an options trader.
Next week, I’ll discuss my current QCOM trade, which as of this writing, I’m on the wrong site of, but here’s to hoping that changes. In any case, I’ll keep you posted.
In the meantime, if you want to catch a good video on the basics of Covered Call Trading, this one from thebluecollarinvestor.com provided great value to me in my journey.
Do you have any experience with covered call or cash secured option trading?