Options Trading Strategy for a 50% Return and Downside Protection

Don’t you wish there was a strategy that
could lock in a cash return on your stocks while also producing potential returns of
50% or more? In this video, I’m detailing the options
trading strategy I use to do just that. In fact, I just invested $25,000 in two stocks
for an immediate 18% cash return and the potential to make 48% in just one year. We’re talking stock options investing today
on Let’s Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel. A special shout-out to all you in the nation,
thank you for spending a part of your day here. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. Nation, we talk a lot about buying and selling
stocks on the channel but there’s one investing strategy I’ve been wanting to share with
you for a while now. I waited because stock options aren’t something
every investor is going to want to use or even needs. It’s a little more complicated than basic
investing but if you’re ready for it, I’m going to reveal my favorite options trading
strategy, one that I regularly use to get an instant cash return and total returns of
twenty- to thirty-percent a year. Better still, this is the best strategy you
can use investing in deep value stocks, those companies with falling share prices that you
love but aren’t quite sure about the downside risk. So what I want to do in this video is give
you a quick stock options tutorial first, describe these investments and what they’re
used for. We’ll look at some pros and cons of options
trading and then I’m going to walk you through that strategy I use with a real life example
of two stocks I just bought and a $25,000 bet that could yield a 50% return. Options are an investment that gives the buyer
the right but not the obligation to buy or sell a stock at a specific time in the future
and for a specific price. There are two types of options, calls and
puts. Call options give you the right to buy a stock
at a certain price while put options give you the right to sell a stock. Now this can all be really confusing so let’s
look at an example. This is a call option for gold miner Eldorado
Gold. The first thing you see is that this is for
January 2021 which is the expiration date. This is the day that the call option expires
and I can either buy the stock or just let it expire. Next to that is what’s called the strike
price, that’s the price that I’ve locked in with this option. What it’s saying here is by buying this
call option, I lock in the price of $10 per share for ElDorado Gold on January 2021. If the price of the shares is higher at that
point, I can buy them for $10 per share and immediately sell for a profit. Lastly here, you see the premium of $1.45
per share. This is the price that I have to pay to buy
this call option. So buying a call option isn’t actually buying
shares of stock, not yet at least. You pay that premium amount to buy the call
options. The options then give you the right to buy
the shares at that set price in the future. Now when January 2021 comes along, if shares
of ElDorado Gold are above $10 each, I have this option and can buy them for that price. For example if shares are trading for $15
each then I can buy for $10 and have an immediate $5 profit per share. If on the other hand, shares are trading under
$10 each, say for $8 per share, then I just let the option expire. I wouldn’t use the option to buy at $10
if I could just place a regular market order and buy them for $8 per share. This is an important part of options trading. That premium you pay is gone whether you eventually
buy the shares or not. The hope is of course that the shares are
above the strike price, $10 per share, and that premium you paid for the option, the
$1.45 per share in this example. I don’t want to get too deep into the weeds
here because I can already see some eyes glazing over out there. Stock options takes a little practice to really
understand what’s happening and you might need to read up on it a little more but I
want to get to that strategy I’m using. I’ll create another video on these basics
so make sure you subscribe and tap the bell notification to catch that. Now investors use options trading for a couple
of different strategies, it’s not just betting on the direction of a stock price. Options can be used to buy into stocks at
a discount, to benefit from a quick price change or even to reduce your risk and get
an instant return in a stock which is what we’ll be talking about here. The strategy I want to show you is the covered
call strategy, it’s an options strategy where you buy shares of a company and immediately
sell call options. So remember, a call option gives the investor
the right to buy those shares at some point in the future but for every investment, there
is a buyer and a seller. So when you sell a call option, you are giving
someone else the right to buy the shares from you at that price in the future. And if you’re thinking, why would I give
someone this right, it’s because they pay you that premium amount when you sell them
the option. Going back to our ElDorado example, if we
sold this call option to someone, they would pay us $1.45 per share immediately. The shares are trading for around $7.60 each
as I record this, so I’m collecting $1.45 for every share I own or a cash return of
about 19% on this investment. Now if shares of ElDorado went up to $10 or
more by the time this option expires, that investor would use their call option to buy
them off me for that strike price, the $10 per share. I would make the additional return from where
the shares are trading at today to that $10 but that return would be capped. On the other hand, if shares of ElDorado didn’t
make it to $10 each by the end of that call option, the investor would do nothing. They wouldn’t buy my shares for $10 each. I would keep those shares AND the $1.45 premium
for each option. Again, a lot to take in if you’re just starting
with options trading so I’m going to go through a few more examples here. I’ll show you the actual covered call options
I’ve used in my portfolio, then we’ll cover pros and cons and how to set up this
kind of investment. Here we are in my ETrade account, this is
actually one of four accounts I have on ETrade but this one is where I do most of my trading. Here you see I’ve used this strategy with
ElDorado Gold, ticker EGO. I started buying into ElDorado early in 2018
eventually putting together an investment of 10,000 shares at an average price of $6.46
per share. Now you see here that I’ve sold 50 contracts
of these two call options, one at a $6 strike price and another at a $7 strike price. An important note here, options are sold in
groups of 100 shares, called a contract. So those 50 contracts are options on 5,000
shares, that’s 50 times 100 shares each. So I sold 50 call options contracts against
5,000 of my ElDorado shares for that strike price of $6 for $1.10 each. The other set of 50 call options at the $7
strike price I sold for $0.81 each share. That means altogether I collected $9,550 from
investors that bought these call options from me and locked in their share price of $6 or
$7 per share. If you add these three positions up, between
the shares I own and the call options I’ve sold, I have a net gain of $9,500 and part
of that is the value I still have in the call options. That’s about a 12% return on the money I’ve
invested and on top of the $15,000 I collected by selling call options in 2018. Remember, when I bought these shares in 2018,
I sold call options against them and collected that premium but because the share price didn’t
go up to where the strike price was on the calls, those options expired worthless and
the investor didn’t do anything. I kept that $15,000 the investor paid me for
the options and I kept the shares. So if these call options are used to buy the
shares from me in January 2020, which it looks like they will be with the shares trading
above the strike prices, then I’ll have made a combined $24,550 on the investment. That’s about 38% over the two years or about
17% annualized. Now I want to walk you through two investments
I just made on shares of Pinterest and Uber that could pay off as much as 50% each over
the next year. So if we scroll down, we see I bought 600
shares of Pinterest and 600 shares of Uber recently. The Uber shares were actually bought in two
days, first on the big disappointment in earnings and then the next day when the shares fell
again on the lockup expiration. Against those shares I bought, I sold call
options for that covered call strategy. Here I sold six contracts of Pinterest call
options at the $25 strike price expiring in January 2021 and I collected $3.75 for each
share. That means I collected $2,250 from an investor
to sell them the right to buy my Pinterest shares for $25 in January 2021. For the Uber position, I sold two contracts
at the $35 strike price and collected $3.38 for each share. Then I sold four contracts, and remember that
represents 400 shares, I sold these on the $40 strike price and collected $3.26 per share. Total here, I collected $1,980 in premiums
for selling the call options to investors One of the things I love about the covered
call strategy is that you collect an instant cash return on your investment and you can
really look at this one of two different ways. For those Pinterest shares, I paid $20.54
per share but got an instant cash back of $3.75 each by selling the call options. So in effect, I actually paid just $16.79
for those shares which is an 18% discount to where they were trading. So you can either think of that premium you
collect as a cash return on your investment, like a really sweet dividend, or the ability
to get the shares at a discount. Now let’s look at what could happen with
this Pinterest position. If Pinterest rises to $25 a share by January
2021, that investor is going to buy my shares for that price and I’ll be out of the position. I’ll sell the shares for $25 each and keep
the $3.75 per share for each call option. Now this is one of the risks to covered call
options trading but one that I think you’ll agree is worth the risk. If Pinterest shares surge to $40 each by the
end of that call option, I still have to sell them for $25 per share to that investor. That’s why they bought the call option,
to lock in that strike price. Now if that happens though, look at my total
return here. I got the shares for $16.79 each by collecting
the $3.75 premium against the share price of $20.54. Selling the shares for $25 each means a 49%
return in the 14 months to January 2021. That’s a return I can live with. Especially considering the alternative here. If shares of Pinterest don’t head to $25
or higher by that date, I keep my shares. The investor does nothing with their call
option and I keep the premium. I made that 18% cash return or the 18% discount
on the shares, whichever way you want to look at it. Better still, I can sell another call option
to another investor, collect that new premium and this just all keeps going. So I’m either collecting a huge return in
one year, upwards of 50%, or I get cash returns every year selling these call options and
eventually get that higher return when the shares do bounce higher. Now I want to show you how to set up a covered
call strategy as well as dig into some pros and cons but first, I want to get your feedback. The covered call strategy is just one thing
you can do with options trading. In fact, I used to spend a lot more time using
many other strategies, strategies called condors, butterflies and even naked positions…which
unfortunately are a whole lot less exciting than they sound. Anyway, question is, do you want to see videos
on these other types of options trading strategies in the future? Some of these are higher risk but can mean
higher return as well, so scroll down and let me know in the comments whether you want
to get into these other strategies. So just a few pros and cons of this covered
call strategy before I show you how to set it up and manage it for those returns. Pros of the covered call strategy is that
instant cash return on your investment. You effectively lower the cost you pay for
a stock so it can be a great way to pick up shares at a discount. This also helps to limit your risk in a stock. I can see those shares of Pinterest fall by
another 18% before it hits the price I paid. This is a great income strategy and one you
can use if you’re not quite sure about the upside on a stock. For example, if you own shares of a stock
for a long-term investment but maybe you’re worried about the downside over the next year,
you can sell some call options and protect your investment from a 10- or 15% drop. There are risks to the covered call strategy
though and I don’t want you to think I’m promoting this as some miracle investment. Most obviously is that you’re capping your
upside return using this strategy. If shares of Pinterest surge higher over the
next year, I still have to sell them for $25 each to that investor that bought the call
options from me. I’ve capped my return at 48%. Another possible risk of covered call options
trading, depending on how you want to look at this, is that if the share price keeps
falling. This is what happened with those 10,000 shares
of ElDorado Gold I bought in 2018. The share price kept dropping so even with
the cash collected on the call options, I was still looking at a little loss. Now I eventually made it back up because the
shares rebounded and I was able to sell more covered calls against it. Setting up a covered call options strategy
is really easy. Any stock trading platform will have the options
for the shares where it’s available. You click through and see all the dates for
which options are trading. This is usually monthly for the next few months
out or there are also these longer-dated call options expiring in January. I like to use January options because they
are more liquid, meaning there are more investors buying and selling. That’s so I can get a good price on the
options and can buy or sell them quickly if I want. So you click through to the date you want
and you see all the different strike prices. Here we see you can buy or sell options on
Pinterest shares at a share price from $13 to $27 per share and actually there are more
strike prices if we opened the table up further. I usually like selling covered calls for around
twenty- or thirty-percent higher than the current price. That means the shares can run 30% higher before
I get my shares called away with that option contract. And you can do some quick calculations to
see what your returns would be on the different stock options. If I were to sell these call options with
the $25 strike for $3.40 each, I would collect about a 17% cash return or lower my price
to $16.97 for shares of Pinterest. If I then sold for that $25 strike price,
that would mean a 47% return over the next year. If on the other hand I were to sell the calls
at the $20 strike price, I could collect $3.90 a share for an instant 19% cash return. That would cap my total return at around 40%
on the shares if I sold them for $20 each in a year, but you get a little more downside
protection with these lower strike prices. I’m going to go with this $25 strike price
and click through to the order. Now this gets me to the screen to just buy
the call options but what I want to do is here called a buy-write. That’s where I’m buying the shares and
at the same time, writing a call option against it. Depending on your investing website, this
is either going to be called a buy-write or a covered call. Clicking through here I want to set this up. I put in my stock order to buy 500 shares
of ticker PINS, that’s shares of Pinterest. Remember these have to be in hundreds because
you’re going to be selling options contracts and each contract is worth 100 shares. Then I go down here to the options trading
part of the strategy, I look in this dropdown for sell open, because I want to sell options
against my open position of stock. Then I would make this for five contracts
against that 500 shares of stock, and make sure these are call options we’re selling. I pick my expiration date, which we wanted
to sell these January 2021 call options and at the $25 strike price. Now when you set this up, everything will
populate on the side here with the current stock price as well as the bid and ask prices
on the options contract. One thing we didn’t talk about yet was that
options contracts can have bid prices by buyers and ask prices from sellers that are miles
apart. When you go to do this strategy, you want
to get a good price for your options so you’re going to be placing what’s called a net
debit order or a limit order. In effect, you’re telling the broker to
place your order at a certain net cost for the shares. I usually use the mid-point between the option
bid and ask or maybe a price a little better. So here we have buyers willing to pay $2.75
per share for Pinterest call options and we have sellers that want $3.80 per share for
the same contract and we see that the last contract traded was for $3.40 per share. Just using this last price of $3.40 per option
and the $20.41 per share on Pinterest, we would have a net cost of $17.01 if we were
to buy the shares and sell the call option against it. I would normally round this down, so put in
this order box that I want to pay a net debit of $17 per share for 500 shares of Pinterest,
selling the five contracts for the covered call strategy. If I click through to preview my order, I’m
investing $8,500 to buy these 500 shares and getting that $3.40 each back as cash premium
from the option investor. If that trade goes through I’ll get that
instant 17% cash return from the call options. If the share price runs to $25 or higher by
January 2021, the call options buyer is going to use those contracts to buy the shares from
me and I’ll make that 47% total return. If the shares don’t reach $25 each, I keep
the stock and the premium I collected and can turn around and sell another five options
contracts to collect more cash. Click through the video on the right to see
my five favorite tech stocks of 2020, five tech names to buy whether you use this covered
call options trading or not. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

60 thoughts on “Options Trading Strategy for a 50% Return and Downside Protection

  1. I tried to do what you say, but I always had a hard time finding deals where an option that far out of the money had such a high time value. Perhaps I was trying too short of terms around 1 ~ 4 months.

  2. What kind of stock options strategies do you want to see? Call options, Put options? Strategies to protect your money or strategies to grow it?

  3. I use covered call strategy as well. Very profitable if done right. It's the equivalent of getting rental income for stock in your portfolio. I usually use dividend-paying stocks too. Buy a stock before its ex-dividend date, sell a call option. You get the option premium, the dividend, and any upside on the stock.

  4. I think selling options are great. A great way to make extra income from the stock market with little risk. They have a bad reputation since people think options are big all or nothing bets but selling puts or calls is pretty safe,


  6. hey there very interesting video, my question is, what if i want to sell the stock before the call option expires? and can if i buy a call option, can i sell my call option?

  7. Good content for understanding options i am very new at trading so it is a bit hard for a newbie like me but if i continue to trade i know i need to learn and try options eventually i need to repeat to watch this video Thank u for ur time Mahalo from Hawaii where ur army friends are stationed here

  8. I was just asking about selling covered calls on stocktwits the other day, and this video made that concept much clear now. I appreciate it!

  9. But it gets even better when you do bullish call spreads. Less capital, less risk, greater returns! Options are the best.

  10. Options are really one of the most dangerous financial product.

    Think about it: You need to know the right price, to the right time in the right stock. Thats gambeling.

  11. This is really cool. I think this is the first time I've ever had options explained to me in a way that was easy to understand. Thanks, Joseph!

  12. Yes do more videos. Especially on how you select stocks,strategies, and prices to sell and how to make this a monthly income stream

  13. Hi Joseph, I love your videos I have a small portfolio and finally I’ve been making some money thanks to this strategy.
    Can u make a video with this same strategy but investing with ETFs and levered ETFs like TQQQ.

  14. YESSSSS!!!!!! Finally a great explanation of an options strategy. Please keep the series going about other options strategies.

  15. I understand more than when I started. But not enough to try it myself! Great video. Keep up the clear, no BS videos!

  16. I love the option stuff, and covered calls are a good way to learn. I prefer faster decay, so I use 30 to 45 days to expiration . A lot more experience gained that way due to number of occurrences. Back when GLD moved from $125 to $174, I was selling weeklies for nice income. One morning, when I was a newby, due to some price reporting glitch, my account showed a net liq of NEGATIVE 22 million dollars. I knew it had to be a broker error, but I suddenly couldn't breathe, and had to get up and walk away for a bit. Ha, good times…

  17. I just want to follow you around, be your shadow, for about a week. I tie a mean bow tie AND you get free childcare. What do you say?

  18. Hi Joseph! I remember asking you about this earlier this year – thank you for putting this clearly explained video together. Looking forward to the series!

  19. Hey thanks for explaining that. Most people on youtube, and in most investing videos, fail to start with the basics when explaining options.

  20. Yes I like you talking about options. I have small acct and trading options to help grow my acct so I can invest in my dividends stocks to hold forever or long time.

  21. Thank you for the video. A Very clear and concise explanation of the covered call strategy. I’m still working on growing my brokerage account … but when I actually own 100 shares of something I will be using this strategy.

  22. hi joseph, great content. please do more videos on options! i am a seller myself. why don't you sell options with a smaller time horizon (1 month)? it usally has a better return per month ratio πŸ™‚ maybe because the instant cash flow is bigger and you don't have to sell options each month? kind regards from germany πŸ™‚

  23. Thank you Joseph for all your great informative videos. I would love if you can create more videos on other strategies e.g. butterfly

  24. I would really appreciate dedicated videos for each of the options strategies. Break it right down, share software recommendations, and step through each part of the process. Also, how to evaluate stocks for options trading (even more basic/ thorough than what you e already done.)

  25. I have never done options trading and have seen it as high risk high reward. The way you describe it makes more sense and not as risky. I also like how you explained the risk such as if Pinterest goes up to $40. I like the analogy of collecting rental income from a previous comment. I can see myself starting this off in a small way and seeing what happens

  26. Question let’s say for example with Pinterest if in Jan 2021 when it expires and the stock at that time is trading at $11. Do you buy more of the stock to reduce your costs because at that point the $25 strike price premium would probably be like 5 cents or so

  27. Do you have experience with ’cash-secured put writing’ to try to obtain a stock with a discount? That could be a good video episode

  28. πŸ›‘ Very nice video. Question…Is there a place online I can learn how to trade options? Similar to paper trading?

  29. Could you do a segment on bonds? with a looming recession I would like to hear your thoughts on Vanguards bond funds and bond funds from other brokerages. Some bond funds carry just ask much risk as dividend stocks yet pay out monthly. Are most bonds over priced right now? is it too late to get in? will they fall if there is a market correction?

  30. Yes I would love more videos on options trading I have a small acct and learning and working on taking advantage of options for gains to bust my acct. thank you also for all your dividend info I am getting ready to put 1000 in MO and would love your option of this stock long term and recession guidance.

  31. Another great video! I'd love more options strategies! Your qualifications make me trust your knowledge and input rather than some 20-30 year old who "got rich with options" and now is sharing their strategy to success. I'd consider myself and intermediate investor and learning about options is extremely helpful! Covered calls and puts in future videos would be helpful as well as other strategies you mentioned!

  32. Hi, Thanks for the video. Always interesting.

    Question: What if I want to sell my holding in the stock while there is a contract on it? Do I have to pay the call contract holder his money? Is it even possible?

  33. I've watched a lot of options videos and this is the one that finally made it through my skull. Yes I would love to see more Options videos please. Maybe one about stranglehold positions?

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