16 Minute Read

Friday Feature – Naked or Covered

April 30, 2021

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Which do you choose

Happy Friday Traders,

How easy is it for one to make decisions? Do you go with your first instinct, make a pro and cons list or just flip a coin? I guess that it depends on the decision at hand right? Flipping a coin on which restaurant to order take out is one thing but doing the same for let’s say buying a house without viewing it, getting an inspection and appraisal done, not so much.

Some decisions are far easier to make than others and when it comes to the world of financial markets, one should consider putting the coin away and reach for a pen and paper instead. When you are new and are introduced to the markets your first decision is which product do you plan on using between stocks, options, futures and forex. As you get more in-depth with whatever product or products you choose, the more choices you have to keep making. In the world of options, the are so many choices to make you cannot run out of options. Having an array to select from usually will come down to a matter of preference. A bullish bias in the market will require a few decisions to be made before click that confirm and send button.  Do you want to buy for directional or sell for cash flow? If you decide to buy, are you buying a long call or bull call? If you go for the cash flow, will be a naked put, covered call, or bull put? I’ll keep it simple and leave it here with the strategy selection but if you’ve looked at the Tackle Trading Playbook  you are aware that there are many other strategies one can use. 

As you’ve seen many times, #teamtackle students and coaches have very similar daily routines. It starts with the Market Analysis:

1) Check the News

2) Check the Economic Calendar and

3) Analyze the broad market indexes

4) Scan the Heat Map

Up next, Portfolio Management, we check our delta and theta numbers to make sure it matches our market posture. We then manage individual trades, update journals, etc. Entering new trades is where we start to set apart. We could be looking at the same stock, we see the same setup, identical triggers, stops and target yet one might go the debit way and the other the cash flow route. Interestingly enough, we could even go the cash flow route and one goes naked put direction and the other covered call. What makes one decide to trade naked and the other covered? Well, I can bet you it’s got nothing to do with the hot or cold temperatures of where they live LOL! It has a lot to do with their trading style, type of account, the amount of capital in the account, position size, and risk tolerance. There is also that other little thing called ROI %. Am I getting paid enough premium to either left-click or right-click? That ultimately comes down to the type of account you are trading from.  

Let’s do a quick compare and contrast on SLV and how one might decide to go naked put or covered call. Here are your Playbook rules for both strategies. Your bias is neutral to +2

SLV has been trending sideways for months which makes it ideal for a covered call or naked put.  One might just opt to buy the shares and do covered calls if account value allows for it, plus it’s a low-cost ETF at $24, and you don’t have to worry about earnings. The other may not want to cough up that much capital initially but perhaps wouldn’t mind owning it if it were come to down to $22.4. Also, a naked put on margin would require much less buying power.  

 Margin Account:

Cost                       Cash Flow            ROI%     Delta     Strike Sold           Days to Exp

Covered Call       $1204                    $53                         4.4%      36           $25                         36

Naked Put           $325                       $19                         5.8%      18           $22.5                     36

IRA/Cash Account:

Cost                       Cash Flow            ROI%     Delta     Strike Sold           Days to Exp

Covered Call       $2407                    $53                         2.2%      36           $25                         36

Naked Put           $2231                    $19                         0.8%      18           $22.5                     36

Now that we have the numbers, in some cases if the stock/eft has high enough volatility to get paid a decent amount of cash flow, it would make sense to do cash-secured puts in your IRA/Cash account. However in this scenario, your ROI on a Covered call is far much better, so let us rule out doing a naked put on SLV in your IRA. That leaves us with 3 choices. A naked put or a covered call on Margin or a covered call in an IRA. So how does one decide? Remember your daily routine? That part about checking your delta and theta numbers could be one way to decide. If after looking at your account you determine you need to increase your delta number by +60, then the covered call is the route you take. Here’s how you get the numbers:

Buying 100 shares gives you a net delta of 100 but since you are selling the $25 strike at a 36 delta, 100-36 you have a net delta of 64. The naked put delta we are selling is 18 and that is how much delta you’d be adding to your portfolio at the current price of SLV.  So if you wanted to get to the same equivalent delta of 64, you’d need to sell about 4 naked puts to get you there. That, however, will now cost you more in buying power ($325×4) and you now are obligated to buy 400 shares of SLV should the price come down so this would not be the best option.

Ladies, tonight is our monthly Women In Trading  webinar don’t miss it! See you are 8:30pm est.

Until next time,

Coach Em!

Coach Em

Emily Muiruri

Emily Muiruri

Emily Muiruri was born and raised in Nairobi, Kenya before her family moved to the US and settled in Maryland, Emily began her trading journey in January 2015 after 17 years of Property Management in the Self-Storage Industry. Like many new traders, Emily started off with directional trading strategies such as long calls, long puts and very little in cash flow strategies. Over time that has changed and now her core trading strategies are cash flow based such as are Covered Calls, Naked Puts, and Iron Condors. Though she is still a student learning and enhancing her trading skills, she has a strong desire to teach women to take control of their finances and become traders. Writing blogs is one of the ways she’s is looking to spread the word and get more women involved. Emily knows that with the right education and trading system women can be successful traders.

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