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What if I told you there is an option strategy that can make you money if the market goes down, if the market goes sideways and if the market goes up moderately. Sound too good to be true? It is true if you do a covered call strategy.
First you need to own 100 shares of the underlying stock and then sell out of the money calls. Typically, I sell calls about 30 days out, so I can generate a monthly income. For example, I own 100 shares of Alphabet, known more commonly as Google, stock symbol GOOG. GOOG is currently trading at $152.26 as of Friday 3/29/24. It will cost you $15,226 to own 100 shares. If this is too pricey for your account size, then you can still do this strategy with a lower priced stock.
There are a couple of ways to own 100 shares of GOOG or any other stock. You can dollar cost average into a position, for example by buying 25 shares this month, 25 shares the next month, then 25 more after another month and the final 25 shares 4 months from now, until you accumulate 100 shares. Another way of course, is to just buy 100 shares outright. The third, and I think the best way is to do the wheel strategy, where you sell a put. For example, you could sell the May 3, 147 PUT and collect $2.55, or $255 (Delta of 30). If GOOG remains higher than $147 by May 3, you keep the $255, an annualized return in 35 days of 17.47%. Then, you do the same thing the next month, you still own 100 shares of GOOG and sell another call, about 30 days out and you continue to do this until the stock gets PUT to you. This is much better than jumping in and buying 100 shares at once. Each month that you sell a Put and collect premium, without the stock getting Put to you, you lower your cost basis.
Once the stock gets Put to you, you own the stock and sell a Call, about 30 days out. You could sell the 160C for May 3 and collect a premium of $270 (annualized return of 18.49%). If you think that GOOG is red hot, then you may want to sell the 165C, and collect a premium of $222 (annualized return of 15.07%). By expiration date of May 3, if the stock doesn’t reach your strike price, you keep all the premium. Then you do it again, sell another Call 30 days out, and collect premium.
You continue to do this until your stock gets called away (the price of the stock exceeds your strike price at expiration). For example, you sell the May 3 160C for $270 and price goes to $166. Here is a summary of what has happened over the 35 days. The stock went from $156.26 and is now $166. You sold a Call at 160, so you have an obligation to sell the stock at $160 (though the stock price is $166). So, your 100 shares get called away at the price of $160 and you get paid $16,000. Since you owned your shares at $152.26, you made a profit of $7.74 per share, times 100 shares equals $774, plus you keep the premium of $270, and you are up $1044. At this point you own no more GOOG, but you could reenter a position, by doing the wheel strategy all over again and sell a Put.
Owning any stock has the downside of the stock going way down. If you bought GOOG at $152.26 and the stock falls to $130, then you are down $22.60 per share or $2226. This would be offset somewhat by the Call you sold for $270, however just like owning the stock outright, you are down. If this happens you can still continue to sell Calls, and before letting the stock get called away, you just buy back the option, and continue to own the stock, waiting for a recovery, and continue selling calls.
This strategy works best with solid companies that you are willing to own, not something like BITO, or the new DJT stock. You want to avoid owning 100 shares of any stock that has a big potential of falling in price.
Gordon Dew, Guest Blogger
Trading Club Member
March 30, 2024
At Dorian Trader, we help traders of all levels get started, improve and, ultimately, make more money with options.
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