WOW 22 Covered Call Revisited. Georgio Stoev, Futures and Options Product Manager

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1 WOW 22 Covered Call Revisited Georgio Stoev, Futures and Options Product Manager March 1 17, 2016

2 Important Information- Saxo Bank Educational Purposes: The material is provided for informational and educational purposes only and no information contained herein constitutes a solicitation for the purpose of purchase or sale of any commodity, security or investment, nor should it serve as the basis for any investment decision. The Saxo Bank Group does not guarantee the accuracy or completeness of any information or analysis supplied. The Saxo Bank Group accepts no responsibility or liability for the contents of any other site, whether linked to this site or not, or any consequences from your acting upon the contents of another site. No Guarantee: The contents of this publication should not be construed as an express or implied promise, guarantee or implication by the Saxo Bank Group that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Neither Saxo Bank A/S or its officers, employees, representatives, agents or independent contractors are in such capacities financial adviser. Saxo Bank A/S does not provide investment or financial advice or make investment recommendations. Trading Involves Risk: Trading options can be very speculative and may result in losses as well as profits. You should carefully consider your financial situation and consult your financial advisors as to the suitability of your situation prior to making any investment or entering into any transactions. This disclaimer is subject to Saxo Bank Group's Full Disclaimer available at 2

3 Week 22- Agenda Review of Demo account Brief market watch What are covered calls? Demonstration of a covered call in Saxo Trader 3

4 Market Overview (March 15th) S&P 500-1% S&P 500 Daily VIX 3% Eurostoxx -6.5% DAX -7.3% Nikkei -10% EEM 3.1% Light Crude 0.3% GLD 15% Bonds (TLT) 5% FXE 2.7% FXI -4.5% 4

5 Options Rights versus Obligations Equity option contracts give Call Put On underlying security Long (buyer) Right to buy Right to sell At the strike price Any time before expiration Short (seller) Obligation to sell Obligation to buy Option buyer pays premium 5

6 What is a covered call? Own position in a stock Sell call option on the same stock The combination is called Covered Call Limits the investor s upside on the underlying in exchange for an option premium 6

7 Why sell a Covered Call? Many institutions and retail investors hold stock in their portfolio Investor can partially hedge long stock position from the received premium By selling a call on a stock you own you reduce your cost basis in the position Example: You purchase 100 of XYZ stock for $100 and you sell a call against it for $5. Your cost basis in the stock is reduced $5 to $95. If selling out-of-the money (OTM) investor exits stock at higher price 7

8 8 Historical performance of S&P 500 covered call strategy

Important considerations for CC Investor expects a stock they own/buy to rise modestly over 30 days In order to execute CC you must own at least 100 shares Agree to have the stock called away from

9 Important considerations for CC Investor expects a stock they own/buy to rise modestly over 30 days In order to execute CC you must own at least 100 shares Agree to have the stock called away from you at the agreed price, e.g. April 30 Call Maximum gain is limited by the April 30 Call GE April 30 $0.40 Reduction in cost basis = Net Investment Premium Maximum loss is limited but could be substantial (stock becomes worthless) 9

Setting up the covered call Work with stocks you own or don t mind owning Select a call option that is slightly,3%- 5%, above the stock price Select an expiration, at least 30 days out Look for

10 Setting up the covered call Work with stocks you own or don t mind owning Select a call option that is slightly,3%- 5%, above the stock price Select an expiration, at least 30 days out Look for return on investment (ROI) to be at min. 2.5% ROI = Premium + Stock Appreciation/Net Investment or $.39 + $1.19/28.81 = 5.5% ROI Breakeven = Stock purchase price premium received ($ $.39) = Sell the call to open the trade/buy it back to close 10

11 OTM covered call example CC breakeven at $28.42 Long GE breakeven at $ Stock at expiration 11

12 Management of Covered Call Rule # 1 Exit you can get out of the CC at any time by placing an opposite order Rule # 2 If GE below $30 => no action is required as the option would expire worthless Rule # 3 If GE above $30=> auto-exercise, share are sold at $30 and you receive cash + premium Rule # 4 If GE at $30 before expiration, buy back the option and roll/sell a call for the following month 12

13 What we learned today Covered call is a basic options strategy where investor is long stock and short a call Investor is able to collect premium and enjoy some limited upside if the stock rallies. The risk in a CC is no different from that of just a stock ownership The premium collected could help investors cushion some potential losses in the stock Buy/Write refers to buying stock and selling call simultaneously Investors may sell ATM calls to collect larger premium Selling covered call on monthly basis for regular income 13

14 For next time Practice at least 1 covered call in the papermoney account Watch the video from the OptionsLab page Sign up for WOW 23 Using technical analysis with options trading special guest Kim Cramer ation.html 14

WOW20 Refresher: Getting Started with Options. Guest Speaker: Gary Delany, Director OIC Europe Host: Georgio Stoev

WOW20 Refresher: Getting Started with Options Guest Speaker: Gary Delany, Director OIC Europe Host: Georgio Stoev March 3, 2016 Important Information - Saxo Bank Educational Purposes: The material is provided