Turning $2,383 into $1.4 Million Selling Options
Discover more from A Trader's Education
Turning $2,383 into $1.4 Million Selling Options
Plus, stocks you can use this strategy with immediately and a look at my portfolio.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
It sounds crazy but the math is the math, and the numbers are real. I will walk you through every step of the process so you can see how building your account from just over $2,000 to $1.4 million is possible.
A key difference with this strategy is you are building without buying a single option. Instead, you are selling them. Repeatedly. And with no risk of losing money on the option contract because you are the seller.
I’ll also dive into small stock portfolios you can utilize with this strategy. For example, currently I hold DraftKings (DKNG), Sofi Technologies (SOFI), and Rocket Companies (RKT) and am selling calls against these positions.
There is a science to this art, but it is a simple science and one that does not require too much time to implement. Because who has a lot of extra time on their hands?
First, it is important to understand the strategy so you can repeat it over and over again without hesitation. Also, and probably the wildest part of the calculations, these numbers assume zero appreciation from the stocks you hold.
You read that correctly. The stocks you hold can remain flat for years while you generate cash by selling calls and collecting premium. The trade in is, you give up the “to the moon!” trades with this strategy.
Personally, the “lotto” options trades and meme stock trading has never been something I have been able to find success with. I honestly have never met anyone that has been able to have consistent success trading that way.
Ok, let’s get to the math and then learn how to make $2,000 work harder for you than you could have ever imagined!
Math is Hard so I’ve Done the Calculations for You
Using my portfolio as an example, I have recently bought shares of DKNG, SOFI, and RKT for a total investment of $2,383. I’ve posted my account at Savvy Trader, you can subscribe and follow it here: Trader Nate’s Covered Call Strategy Portfolio
I then sold calls against each position and collected $90 total after fees. The calls expired about thirty days out (more on selecting which calls to sell later) and when they do, I’ll repeate the process.
This creates a cycle that, theoretically could be repeated every month for a total of twelve trades every year. For simplicity and to add a little conservatism, let’s assume this trade can be made ten times per year.
In five years, assuming the same 3.8% trade is made ten times every year, you can see the initial investment quickly grows to $11,827. In year five you would be collecting $324 per trade for a total profit of $3,242 annualy.
Keep in mind, for calculating simplicity, these numbers assume the stock prices remain flat. Zero price appreciation involved, and you can still grow your account to five times its current size in just five years. Amazing stuff!
How long until your account can theoretically grow to well over one million dollars? I did the math and considering the account starts where it does…well take a look.
Again, I’ll mention that with this strategy you are not missing out on any sleep over losing money on an options contract you've purchased. This is because you are not buying any options contracts and instead are on the other side of the transaction. you are the seller.
I can’t think of a better way to grow an account quickly through pure cash collection.
How it Works and Stock Bundles to Consider
I’ve written about this strategy before, so I am going to steal from prior publications a bit here. The most recent A Trader’s Education newsletter about the Covered Call Strategy can be found here: Why Aren’t you Using this Strategy?
(If you have read my prior newsletters, you can skip to the end of this section where I get into stock bundles to consider. This section is a repeat of what I have previously shared.)
To sell covered calls you need to own 100 shares of the underlying stock. This allows you to sell the call knowing if the option is exercised, you have the shares to cover the trade. Hence the name, “covered call”.
When an option is exercised, all that means is the owner of the option has decided to buy the 100 shares he has a right to at the strike price listed on the option. If you do not own the shares at that time, you would be forced to buy them at the current market price to then sell them at the lower strike price listed on the contract.
You do not want to end up in a situation where you owe shares because you sold a call but you don’t own the shares already. That is an approach for the larger and more experienced accounts.
Here are the basic requirements for the Covered Call Strategy:
Brokerage account with Options Trading made available (usually upon request)
Ownership of 100 shares of the underlying stock you wish to sell calls against
That is all you need to get started. I prefer to use a tax deferred account, like an IRA. That is just my preference as I’m building for retirement and not trying to withdraw for income at this time.
You will also need your brokerage account set up to allow for this type of options trading. Typically, selling covered calls requires the lowest level of approval as it is considered a relatively low risk trade when compared to the more complex options strategies that exist.
The stocks you hold can remain flat for years while you generate cash by selling calls and collecting premium.
For guidance, here are the rules I’ve drafted and follow for an effective Covered Call Strategy that works for me.
Identify stocks I want to own (don’t just buy any stock, be interested and expect the stock to grow).
Utilize stocks that you can afford to buy 100 shares of, even if it takes some time to accumulate. If you only have $500 to start, utilize a stock priced at or below $5.
Use charts to identify ranges and buy shares of stock at the low end of the range.
Use the identified range to sell call options at the top of the range.
Use the average daily price range of the stock to understand how much the stock typically moves, try to ensure your option strike price accounts for this.
Sell calls that expire no more than 45 days out and at a strike price near or above the top of the range (I prefer 30 days or less).
Goal is to sell at a strike price that will not be achieved within the timeframe given so the process can be repeated.
Target 3% or more for the premium received, if this is not achievable do not sell the call option.
DO NOT adjust strike price and expiration date to achieve the 3% premium.
Repeat the process as often as possible, staying true to the criteria for selling calls.
Here is an example in picture form for visual learners like me.
These are the fundamental rules to follow that will allow you to collect cash instantly and start building your account. There is nothing more needed than this. However, you can further improve your returns if you spend time identifying stocks with the right characteristics.
Stocks for Small Accounts to Consider
As mentioned above, a requirement for this strategy is to acquire 100 shares of each holding so you can sell covered calls against each lot (100 shares is referred to as a “lot”). So, the price of the stocks you select matter.
Selling options when Implied Volatility (IV) is high will bring in more premium. Finding stocks with relatively higher IV will increase the amount of cash you collect. However, keep in mind that high IV implies bigger movements in stock price so expect fluctuations with your shares.
Here is a selection of stocks that have relatively low share prices coupled with higher implied volatilities, ideal for small accounts looking to sell covered calls.
You can select one, two, or in some cases three from the list above as candidates for a covered call strategy and own the 100 shares required with only one or two thousand dollars to start.
Risk
There is risk involved, just as there is with any investment or trading strategy. The good news here is you know exactly your risk and it all lies with the shares of stock you own.
The covered call strategy requires you own stock which inherently means you are taking on the risk that the shares you own could drop in value. This is why the stock selection part of the process is both very important and personal.
You must find the right stocks for you. Do your research, ask questions, and take your time before putting your money to work. When you are ready, dive in with the knowledge that you are letting your money make money for you.
That being said, if your shares drop to zero you will not be able to sell any calls against them. And if they drop significantly, you will not be able to collect as much premium.
I personally like the covered call strategy because of what I perceive to be lowered risk associated with it relative to other strategies with similar or even lesser potential possible returns. Rather than trying to buy at the right time, the focus now is on selling at the right time to maximize gains.
Unlike buying at the wrong time, selling covered calls at the wrong time does not mean you lose money. It means you might miss out on additional gains, and that you could have earned more, but you are not losing money.
You are locking in a guaranteed profit in exchange for a cap on your gains and if you do it poorly, you simply collect less.
Be Willing to Let Go
A big mistake people make is disregarding this strategy because they are afraid of their shares being called away. If the call option you sold ends up in the money, the owner can take your 100 shares. This is true. Get over it.
Instead of worrying about the shares you just sold, focus on the profits you just made in record time. As an example, if my DKNG shares get called away I will have made a 16% gain when the option premium collected is added into the gains from selling the shares. That is in just over 30 days total.
I am happy to make 16% every month or so if the trade off is selling my shares and needing to buy them back or invest in a new position. Again, this is hypothetical but the DKNG shares I own are real and if they stay where they are as of this writing, I will realize the 16%.
I do want to own DKNG for the long term, so I’ll own it in my long-term portfolio.
I think this is a key distinction. Your covered call strategy portfolio is for generating premium and building the account through cash collection. This is not a place for falling in love with stocks.
That being said, often there are opportunities to buy back shares at the same or lower prices after they have been called away. Here is an example I like to use where the stock, XOM, went on a fantastic run while creating chances to sell covered calls and collect added premium to 2022 returns.
You can see there are multiple opportunities to sell covered calls and if the shares are called away, they came back in range soon presenting an opportunity to buy them back.
I hope you found this information useful. I will continue to post ideas on Twitter for stocks I see in ideal spots for either buying shares or selling calls. I also highlight which call options you might consider selling and why.
If you have any questions, be sure to find me on Twitter @tradernatehere and I’ll reply to your DMs as quickly as I can. Also, be sure to follow for daily posts on trade updates and trading strategies as I attempt to educate thousands on the many ways trading options can help build your account.