Options Trading Newsletter - Issue #110
Differing Standards... [Learning Options - Covered Call]
Differing Standards…
We all give in the same 8 hours of our time to get a paycheck at the end of the month…
But do you feel that your 8 hours of time might be compensated differently if you earn it in a different currency? For example if paid in MYR against being paid in SGD or USD.
The exchange rate is as follows:-
MYR3.36 to 1 SGD, MYR4.4 to 1 USD…
So for the same 8 hours I work, I get paid at a discount to SGD and USD…why so? Is my 8 hours of effort different from that in Singapore or USA? Not really…
But again, many say, the standard of living in different countries are different so we can’t compare 1-1. Somewhat true only if you earn and spend locally…but when you are abroad, you need to pay the premium!
So when Malaysian are travelling abroad, it is always a pain in the pocket 😭💸 eat less, spend less… air is free though…
So how do you compensate with such “differing standards” then? One international solution is to earn in foreign currency of your choice. How? Through trading/investing in the stock markets of course. That way, if you want to earn SGD then trade/invest SGD stocks and if you want to earn USD, then trade/invest USD stocks. Many people still don’t understand the concept that location of living does not mean you can only earn locally. The world has been global many donkey years already and if you do not recognise it wake up!
Share this with your friends as this should be their wake-up call that cross border income generation is way easier today than 10-20 years ago… remote working, online business, trading/investing is all at your fingertips… why earn local currency when you can set your standards higher to the best currency possible…
"If you want something you've never had, you must be willing to do something you've never done." - Thomas Jefferson
SPX (4133)
SPX had hardly moved from last week. Rallies are followed on by selldown. Personally, I am also taking profits off my own positions, not too sure about the market but seems so too. Even big boys AAPL, GOOGL, MSFT, NVDA seems to be giving way the past week.
Manufacturing and Services PMI which came out higher than expected shows that price inflation is sticking and considering these will be used in the decisions for the rate hike on 3 May, what else could the Fed say? “Data shows that inflation is reducing but at a slower pace, and it negates us to continue our policy for now and will be premature to make any changes, we will continue to monitor the data in following months”
As SPX did not even get near the 4200 level last week and retraced after hitting last high of 4159. It would probably continue to bounce below 4200 and as such, we placed some bear call spread positions on SPY at 428 level. The previous Iron Condor is still running well.
The trading range for the week is between 4100 and 4200.
NDX (13000)
NDX failed to break above 13200. On 18 April it touched this level briefly and then sold down. Lets look at the smaller 15 minutes timeframe on this range in April month.
For the 3rd time in April, it sold down when reaching this level 13200, indicating major resistance and sellers lining at this level. The bottom level is also being tested multiple times.
A break above or below is a matter of time, I would say likely happening even before Fed meeting on 3 May. Keep your positions tight and small and always take profits when you can.
VIX has set new lows at 16.17. Our positions on VIX totaled this round…as market continue to be complacent. I don’t think it will hold for long though… market IV remains low including GLD IV also dropped by 30-40%, so we would wait for market volatility to come back in the next weeks ahead of the Fed meeting to see any potential set-up.
Negative signs are slowly creeping into earnings season, with TSLA and NFLX missing revenue forecast. Tuesday after market would be interesting with MSFT, GOOGL, VISA making their earnings report. I ceased LT position on these and only daytrading them in recent week. V and MSFT starts trending sideways at its high.
The trading range for the week is between 12900 and 13300.
HANG SENG INDEX (20075)
HSI failed to go above 21000 and seems to get back down to 20000 level. If it breaks below the green trendline, it is likely to retrace further down. Was in China 2 weeks ago and things does not seem to be going well for the economy. Consumers are not spending and economy is running on government or state corporation spendings mainly. Constructions is seen everywhere but for what these are built, I am not sure as big buildings are mostly empty. Demolishing of old, building of new, perhaps “fake it till you make it”. I am now cautiously bullish on China/Hong Kong only…the previous rally I guess is fueled very much by FOMO on reopening of China.
COVERED CALLS
Covered call is a strategy that is used to enhance return on a long stock position of a minimum 100 shares owned. If you own 100 shares in a stock, you can apply covered call option strategy to generate additional income.
The position limits the profit potential of a long stock position by selling a call option against the shares. This adds no risk to the position and reduces the cost basis of the shares over time.
Trade Set-up
Buy/Own 100 shares
Sell 1 ATM or OTM call for every 100 shares owned
When to Execute
Actually you can execute it anytime but best time is when share price is over extended upside or overbought. Because in such situation, a retracement would likely to follow and the ATM/OTM call sold will likely expire worthless on expiry and you get to keep the premium. Premium earned would offset some of the unrealised losses on stock position.
Aggresive strikes will be done ATM and instances where we do this will be when price is really extended and the strike price is also at a level where you do not mind to sell it. The covered call will just give you a potential to sell higher than current price as you will add the premium received to the strike price to get the overall selling price. In this case you will just leave it for the stock to be called away when it goes ITM.
If you are doing it for additional income or returns, then sell OTM at Delta 20-30. Duration can be 1 week to a month. The shorter the duration the higher the premium received. 4x weekly selling would tend to be higher than 1 month covered call.
Example
If you executed a Covered Call on 19 April when AAPL is trading at 167.76, a 175 OTM 30 days Call will fetch $1.80 premium.
As of 21 April, AAPL share price is 165.02 and the 175 Call price reduced to $1.10.
Position Effects [With and Without Covered Call]
Assuming we did not enter a covered call, on 22 April our investment value will be reduced by 2.74 due to drop in stock price. if we did a covered call, our investment value dropped only by 2.04. The covered call generated an income of 0.70 during the 3 days due to the decay in value. There is another 1.10 premium left till expiry of 19 May.
Increasing ROI
So covered call can be used to increase ROI on long stock position. If we do not want to sell the stock and keep it for long term, entering into covered call will generate additional income and also acts as a temporary hedge on during price retracements. We just need to ensure that the strike price of the calls are always above our cost price.
Trade Management
Selling a call means an obligation to deliver 100 shares. If the share price goes above the strike price of the call sold upon expiry, you are obligated to sell your 100 shares at the strike price which is lower than market price.
So you should understand, a covered call also caps the upside potential of your shares. So it is important when you execute this strategy. Never when the stock price is going up but only when there is signs of resistance or overbought.
In anycase, even if the strike of your covered call is breached ITM, you can continue to roll it as long as you can get a positive credit on roll at the same strike. Possibly you can try rolling at higher strike, at zero cost or small credit. This way you still get to keep your shares and earn more premium and wait for the call to get back OTM or your stock to be called away. You have nothing to lose managing an ITM covered call this way. Alternative is to close both the long stock and covered call in one trade if you do not want to roll the ITM short call.
You can also close the covered call if there is little extrinsic value left and open a new trade when the stock price becomes extended again.
Many stocks now is toppish (and forming double tops), you may want to review the price chart and your positions to see if you need to deploy this strategy on your 100 stock positions.
TRADERS TALK
Listen to us live every Tuesday, 730pm (GMT+8) where we digest the market and also get to the core of becoming better traders.
We are off to travelling again this week. Take care and trade small before Fed Meeting week 3 May. Take profits if you have by this week.
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Understanding IV- Part 2 - How to use IV to trade GLD ETF.
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.
Which strikes do you have for the SPX IC?