40% Gains in Two Months: Printing Money with Covered Calls
Revisiting the MARA trade, including the breakout. And next week's trade ideas.
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Last week I highlighted the breakout potential for MARA and if you got in on that trade you did very well.
You can check it out here.
But that was just the latest trade idea for MARA. Prior to the big move up last week the strategy was selling covered calls for big premiums.
And I mean BIG premiums.
The opportunities seemed endless as the range held for months with each push into the upper band presenting a chance to sell call options and collect cash.
The premiums were high because implied volatility (IV) remained high. Remember, when IV is up it indicates the stock will move more and possibly more dramatically.
This added risk (or potential, depending on which side of the trade you’re on) is accounted for with a higher priced option.
Taking a step back to think about this. It makes sense that if a stock is going to have more movement than usual, the opportunity for it to make a big move in either direction is higher.
If you’re buying one of these options for a stock with high IV, you’re hoping for a big move. This is why you’re also willing to pay a higher price.
If you’re selling the same option as a covered call, you’re risking missing out on the potential big upside gains so you get paid more for that risk.
When IV is up, so are option prices. This is why I look closely at stocks with increased IV.
MARA was a great example and the premiums collected speak for themselves. Overall, I was able to collect 27% in premiums in addition to the 12.6% in gains from the shares.
Nearly 40% total gains in two months! All while the stock traded sideways.
Now that MARA has broken out of the range, what is the next trade?
Let’s take a look at the characterisics of the MARA trade that made it so profitable and use them to find the next one.
Defined range established
Growth stock with high implied volatility
High IV equates to higher options premiums
Stock prices between $5.00 and $30.00 - allows for multiple lots and small accounts to participate
(When I say “multiple lots” I am referring to buying multiples of 100 shares. Each lot equals 100 shares and can have one contract sold against it, the covered call.)
You might have also noticed that I sold cash secured puts (CSPs) for MARA.
A CSP requires you to have the amount of money needed to buy shares at the strike price of the put you sold.
For MARA, I sold $8.50 strike puts. If the shares dropped below that price before the put options exprired, I was obligated to buy the shares for $8.50.
The established range for MARA allowed for confident selling of both covered calls and CSPs. That is the ideal trading process: selling calls at the top and puts at the bottom of the range.
Stocks I’m Watching
HOOD seems to be trading in a nice range with decent premiums attached to it’s options.
The shares have ranged between $8.22 and $10.20, a 24% increase from the bottom to the top. Not bad!
It just rejected out of the top end of the range, which is between $9.82-$10.20. This is the area to sell covered calls in aggressively.
Considering selling the $10.00 strike for a covered call position, using the July 7th expiration date which would collect roughly $15 per contract. That equates to a 1.5% gain in just one week.
If the shares retreat back to the low end of the range, between $8.22-$8.52, I like accumulating shares to sell calls against.
I also like selling cash secured puts when the shares are in this range. I would consider selling the $8.50 strike after shares have bounced off of this level.
I typically end up buying shares and trading for upside and the potential to sell covered calls at the top of the range but the CSP strategy definitely works.
DKNG is also worth watching for sideways action and opportunities to sell options to collect nice premiums.
The shares have struggled to get above $26.40, the top of the recent range but have held up above $24.30 after establishing a broader range with a low down to around $22.75.
Accumulating shares between $24.30-$24.85 is a slightly riskier area of support but might prove to hold up.
Another option is to wait for a retest near $22.75-$23.30 and accumulating in this zone instead. I like this option better but again, it may not present itself.
If you’re considering buying multiple lots, perhaps picking up 1 or 2 in the middle zone before accumulating the remaining at the bottom is a strategy to consider.
Regardless of where shares are bought, I like selling the July 7th covered calls at the $16.50 strike. This collects roughly 1.4% in premiums while allowing for plenty of upside for both buy zones.
With markets overheated, last week showed signs of cooling off in the near term. I am not calling it a reversal, but I would not be surprised to see stocks that have been moving higher start to stall out a bit.
I like the covered call strategy in these spots. As the MARA trade shows, you can bring in a lot of cash while the market is trying to sort out its next move.
The Trading Triangle - Live on YouTube!
If you are looking to sharpen your chart analysis skills further while hearing about what traders are looking at for possible trade ideas, be sure to also tune into A Trader’s Education podcast.
Streaming live on YouTube, I host The Trading Triangle to provide a more robust analysis complete with video. Be sure to subscribe and tune in every Sunday!
You will still also be able to find recordings of the stream on the A Trader’s Education podcast, which you can find on both iTunes and Spotify.
It is packed with value and always an all around great time!
Shaun Clarke - @ShaunClarke_ and Kaye @InvestKaye join me every week. You don’t want to miss it!
Thank you again for reading and have a great week!
Nate