Trading Options: One Simple Income Strategy

Transcript

Good morning everybody. Hope everybody’s doing great. John Napolitano here with you from Top Trading Pros.

For those of you who don’t know who I am, I am the options instructor here at Top Trading Pros and it is my sole job to teach everybody how to trade options in the markets effectively and with the right strategy based on what’s going on in the markets. There is so much garbage out there on YouTube about one strategy or two strategies or oh, you only need a little bit money in your account to become a millionaire and blah, blah, blah. And it really gets my blood boiled because I’ve been doing this for over now two and a half decades.

I’ve worked on Wall street for over two decades. I’ve traded my own capital since then. And what really bothers me the most is when people think that this is just some get rich quick scheme options trading, like anything in life, requires dedication, discipline, practice and time.

If you really, really want to learn this skill, I encourage you to click and subscribe to this channel like this video and I’ll keep producing more as well as check out our website, toptradingpros.com. I have a free ebook you can download to learn my strategies and to learn some of the logic behind how I set up my trades. And also we offer coaching, discord as well as trade alerts and a newsletter.

So these are all the things that we offer at top trading Pros. So please check us out when you get a moment. But what I’m going to talk about today, the reason for this video is a very simple income generating strategy.

A lot of times we talk about trading and about shorter term strategies, but sometimes there are just times in the market when it doesn’t make sense to do that. Or you also want to have maybe a slower paced income generating strategy that’s kind of working in the background. And that’s what I’m going to talk about today.

There’s a strategy called the poor man’s covered call. It’s a really cool strategy. I didn’t make up the name and I’ll explain to you why it’s called the poor man’s covered call in a second, but I’m going to jump right into it.

Now, the best way to kind of talk about this is to show you a live example. And that is what I’m going to do today. So without further ado, let me share my screen with you here.

I’m going to jump right into it. And what I did was I picked just a name. Now, there are rules.

So like I said, if you want to learn how to do this strategy the correct way, and you want to learn a little bit more, please check out our website, toptradingpros.com. But I’m going to show you just the basics on how this works. You generally want to pick a stock that is well known.

You generally want to pick a stock that is obviously in a downtrend, maybe even close to a 52 week low, which is kind of what you see right now. This particular stock,which is Alibaba, is obviously not very popular right now. Now, the reason why it’s not very popular right now is because China, the overall economy, isn’t doing that great.

There’s been some negative headline news, obviously, and here and there. So for the most part, Alibaba is in pretty bad shape as far as technical indicators go. It is in a downtrend below its moving averages.

It also looks on the RSI, by the way, it looks oversold. So for you counter trend traders out there, this could be also a buying opportunity. But either way, what you want todo is pick a household name that trades fairly well and that also, you think will not go out of business in the next year.

Now, even though Alibaba is off its highs, I don’t think Alibaba is going anywhere. And I also don’t think the Chinese government’s going to allow Alibaba to go anywhere because they are a very large income generating business. So either way, what you can do in a situation like this, obviously, if you wanted to buy the stock and hold it for a rally, that can take several months, that could be an arduous process where it maybe meanders down at these lows for a really long time in the options market.

You can take advantage of that. You can take advantage of time. And that is one of the things I teach my community members and other traders.

So one of the things you can do, instead of buying 100 shares now, 100 shares, by the way, and you sell covered calls against it, you have to have at least 100 shares because 100 shares equals one contract in options land. What you basically have to do is buy 100 shares. Now.

It’s at $72 right now, 72 27. If you were to buy 100 shares of this, it would cost you $7,200. That’s $7,200 that you’re tying up your capital in your account with while you’re generating an income strategy of selling covered calls.

Now, what you can do instead, now, let’s say you have a short term target of, let’s say, oh, I don’t know. If you look at the 20 day moving average here, current price is 72.Maybe you have a short term target of 75 or 78 or somewhere around this level, or maybe even a little bit lower.

Maybe you think it might rebound up to here, maybe roll back over, go sideways for a little while before it stages any kind of longer term rally. Well, what you could do in a situation like that. I’m going to jump into Thinkorswim platform right now.

It’s one of my favorite platforms to trade. We’ll go into here and I’ll show you what you can do. Now, keep in mind, $7,200 is that number in the back of your head that you’re going to have to spend in order to buy 100 shares.

What I recommend you do, one of the things that makes sense instead, is go out at least a year. In this case, you can go out to December 2024, or you can go even further into January 2025. I’m on the options chain for Alibaba right now.

And the at the money option, the 70 call option, is going to cost you about $1,400. You see right here, it’s 1380 by 1415. So let’s just call it $1,400 to make the math simple,okay? If you went ahead and bought this option for $1,400, well, think about this.

Instead of spending $7,200, you’re basically renting the option for 408 days for $1,400. Your Theta decay, by the way, which is how much money you lose just by sitting in this trade, is $2 a day. So assuming Alibaba doesn’t make any move whatsoever and stays sideways, you could potentially lose $2 a day in time decay.

Okay? So you’re going to have to beat that every single day in order to have a profitable trade. Assuming Alibaba remains sideways. Right? That’s a big assumption, by the way.

Obviously, you want the stock to appreciate. So what you’re going to do now is go out maybe to about 30 days to January 5 once you’ve purchased that leap. That’s what it’s called a long term equity participation anticipation.

You’re going to go ahead and sell premium against it every single month. So in the case of your first target being 75, if you’ll notice right here, if you go out 30 days and sell a call option against that leap, just like you would 100 shares, you’re going to collect about $160. Now, that doesn’t sound like much, but on a $1,400 investment, right?Think about that for a second.

On $1,400 investment, you’re going to take in $165 a month on average. Right? So let’s talk about that for a second. 165.

Now, if you are able to do this every month, and obviously you’re going to roll up your strikes as Alibaba increases in value, and that’s obviously what you hope is going to happen. Just like if you own the stock, you’re going to every month change your strike price. So come January 5, when this expires, when the 75s expire, you’re going to maybe move up to 80 and maybe 85 and maybe 90 and so on and so forth.

But either way, assuming you get roughly about $165 a month, you’re looking at a $1,980 yearly income from a $1,400 initial layout. So I don’t know about you guys, but that’s basically, I kind of screwed up the math here. But basically, as you can see, if you take 1980 and basically divide it by 1400, you’re talking about 141% rate of return over the course of an entire year.

And by the way, that does not take into account the appreciation of your actual underlying leap, which could obviously change on a month to month basis. Now, there’s rules for this. Obviously, if it goes past your short leg, you probably have to close out the whole thing.

But guess what? That means that your leap is making money. So you should be happy. That means you might make a 20 30% return on your overall investment.

Obviously, you should have your risk management and your stops in place and stuff like that. But for the most part, this is a sleepier strategy that I teach our community members. This is something that you can have running in the background while you’re actively trading.

So there’s so many options, strategies you can use. This is just one of many. Like I said, there are very specific rules for Alibaba and for poor man’s covered calls that you should follow.

As you can see, the reason why it’s called a poor man’s covered calls because you don’t need as much money. Instead of laying out $7,200, you’re laying out $1,400 forthat initial investment. So these are strategies I teach our community members on a daily basis.

These are strategies that create generational wealth for not only you and your family. So if you want to learn options, trading the correct way, if you want to learn the right strategies for the right time and the right situations, spend some time with us. Please @toptradingpros.com.

Check us out like and subscribe this channel if you want to see more videos like this that will actually help you to be successful. Okay? So hope you have a wonderful day.Everybody.

Take care and happy trading. Take care, everybody. Bye.