lystn

Hey everyone. Welcome back to the daily call. On today’s daily call, we want to talk about the two major reasons why you shouldn’t trade covered calls. Now, we talk about covered calls before on this podcast, also on our regular podcast. Covered calls are a great way to transition from stock trading to options trading. In fact, it’s something that I suggest that people do or at least start exploring because it's a very smooth bridge between the two I guess ways of trading, the two systems of trading. But the two major reasons why you shouldn't trade covered calls the more you learn about them even though you might start doing that initially as a good bridge or a good segue into options trading, is that one, stock is still incredibly inefficient and capital intensive. This is the first reason. Stock requires a ton of capital to purchase and to do a covered call, you have to own at least 100 shares for each covered call that you sell. For us, stock is incredibly inefficient and very capital intensive. Especially if you’re a small account trader or if you’re on the smaller side, you want to ultimately grow your account size and be able to diversify across many different tickers. If you’re required to buy 100 shares, that pigeonholes you into one particular stock, one particular ETF and doesn't give you the flexibility to move around and basically diversify your portfolio. The reality though is that you can basically replicate a covered call position with options. If you tell me, “Kirk, I'm totally set on Apple. I believe in Apple the long-term. I never want to go away from it, whatever the case is. I want to be long Apple.” Great! You don’t have to buy Apple stock. Why don’t you buy a deep in the money call option say one year out and it would cost you a fraction of the cost of buying the shares. Now, you may not get the 1:1 exactly ratio where if the stock goes up by a dollar, you make a dollar. You may make $.90, but it’s going to cost you a fraction of the cost and you’re going to be able to synthetically replicate a covered call position with much less capital and be able to actually do this on multiple securities now. Maybe originally, you could only trade Apple because you only had enough money to buy 100 shares of Apple. Well now, you could do Apple and Facebook or Apple and Tesla or whoever you want to do. I’m not suggesting you do any of those stocks anyway, but you get the idea. The second reason why you shouldn't do covered calls is that it's still highly directional. Covered calls, no matter what you think or what you say, are highly directional, meaning you are only bullish on that security. Yes, covered calls does reduce the cost basis. It reduces the ownership cost of that stock. But still, do not misinterpret that for still having a highly directional stock portfolio where the only way that you make money is if the stock continues to move higher generally. If the stock has a 10% overnight correction or a 15% overnight correction or if the whole market starts to go down, you carry all of that risk with you on the downside. To me, that's a total stopper for me for covered calls. I don’t trade covered calls for these two reasons. They’re highly capital intensive, you can replicate a position with options for a fraction of the cost and they’re just way too directional for me. Now again, if you 100% believe in a company, I’m not saying that you don't do a covered call. You should. If you want to own the stock or you have to own the stock for some reason, go ahead and do the covered call. It's way better than just owning the stock outright to use those options contracts to improve your cost basis, improve your return, but you are also still highly directional in your trading. If the market goes down or if the market trade sideways, you don’t really generate any consistent income in your account. Hopefully that makes sense. I’m not sure if I’m going to get a lot of covered call people who are now going to email me and say, “What are you talking about, Kirk?” I don’t know, but I think you’ll realize too if you start really looking at how covered calls are structured and how they’re setup that we shouldn’t be trading them, that we should be trading something more efficient, a better use of our capital, a higher ROI with a higher probability of success and basically, just more diversity in our account which if you want to generate income long-term, that’s the way that you got to do it. Hopefully you guys did enjoy this call today. As always, if you have any comments or questions, please let us know. Until next time, happy trading!