Last update: July 2021
I seem to have struck a nerve with my call for a reverse split in USO.
And that’s a good thing.
When nerves are struck, opportunities for enlightenment emerge. I would be remiss, not to mention a sorry excuse for a mentor, if I didn’t take the time to clarify a few things. See, you shouldn’t much care if the white horse of reverse split salvation swoops in to rescue USO from an ignominious fate.
We’re all better off, trust me.
The primary concern seems to be the increased cost for deploying covered calls if USO should magically jump to $40 or $100 a share. At its current perch of $11, it costs a mere $1,100 to buy 100 shares of USO. If you’re trading on margin it’s only $550. The low price tag obviously makes it an ideal candidate for the beloved covered call strategy.
But, let’s continue to play this movie out. As mentioned in Free Oil. You Heard it Here First! USO will reach zero by September 2016 at its current rate of decline.
I know, I know, it won’t go that far. Fine. But let’s say it drops to $7. Do you realize the increased difficulty of trying to consistently sell covered calls on a stock in the single digits? It’s not easy for two reasons. First, even if the options are listed in 50 cent increments, that’s still a 7% jump (0.50/7) as you move from one strike to the next. That means the second strike price OTM is 7% further away than the first strike price OTM. As a result, you’re probably relegated to only selling the first strike OTM. Some months the ATM option may be the only call with any premium worth selling. That seriously limits our flexibility in trying to efficiently sell covered calls on USO.
The second reason is the same one mentioned in Why USO Needs to Split…Pronto. The premium you’re able to receive selling calls on super low priced stocks is peanuts. If USO continues plumbing the depths it will get to the point where your commission costs to enter and exit the short call become too burdensome.
Now, that’s not to say you can’t keep doing it. Trade away, my friend. All I’m saying is it’s much more efficient to deploy the covered call strategy on a $40 stock with call options listed in $1.00 increments (that’s 2.5% apart) that offers premiums ranging from 50 cents to $1.50, versus a $7 stock with calls 7% apart offering a mere 8 cents to 30 cents of premium.
Now, what of the additional cost to snatch 100 shares of the $40 stock. We’ve increased the cost from $1,100 to $4,000. Suppose we lack the capital to make a $4,000 covered call trade a feasible proposition.
Then sell naked puts. I bet the margin requirement for selling an OTM put on a $40 stock isn’t any greater than the cost for initiating a covered call on an $11 stock.
Can’t sell naked puts?
Then do a bull put spread. I mean, you could short a 40 put and tack on a long 30 put for a mere penny just to cap the risk. Your cost would still be cheaper than the covered call on USO at $11. But the trade would net you more cash flow for the commission required.
Nerve Striker, out.
Tackle Trading Resources on Covered Calls
Continue learning about this powerful options trading strategy: the Covered Call. Tackle Trading has all the resources you need to MASTER this strategy like a PRO.
Covered Call For Beginners [Free Articles]
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
In this video tutorial, Coach T from Tackle Trading walks through a research session for covered calls.
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
The Tackle 25 2016 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
I seem to have struck a nerve with my call for a reverse split in USO. And that’s a good thing.
Watch and learn as Coach D demonstrates how to roll a covered call down and out to offset risk and bring in more premium as he repairs a protective call write that has traded below the strike price and break-even price point.
Just when I think I’ve exhausted my inventory of covered call insights I stumble upon yet another blog worthy concept. Today I’ll shine a light on how to identify the remaining profit in your trade, an essential skill for covered call management.
With the advent of weeklys options the choices facing option traders has multiplied ten-fold. But it shouldn’t be overwhelming.
Listen up you covered call lovers. Today I’m tackling some common questions on how to get the most out of your beloved buy-writes.
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
How to leverage an IRA account by selling covered calls on long-term call options (aka LEAPS) instead of stock? Read on.
The Tackle 25 2017 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
I think I could write about covered calls and naked puts every single week and still have plenty to say at the end of the year.
I received an email the other day from a trader that bought a few stocks and has been selling covered calls against them. He had questions. I have answers. Here we go.
Nothing like a monster “V” shaped reversal to get the juices flowing, am I right? Count me among those suffering whiplash over the market’s death-defying whoops and whirls of late. Yesterday was particularly annoying for those short delta toting traders like me.
Last update: August 2021 ≈ Cash Flow and Growth ≈ I put a poll question in the clubhouse recently asking the Tackle Trading community a simple question: Do you trade Covered Calls? If you haven’t answered the question yet, you still can HERE. Of the 5 potential answers, the breakdown was interesting. 38% said YES
Traders have all sorts of rules and guidelines for managing covered calls that move in-the-money.
Let’s talk about proper strike price selection for covered calls and protective puts.
Portfolio Protection For Beginners [Free Articles]
Everyone invests. Everyone has money. Currency is a form of investment since the gold standard was removed from the currency system.
You’re a goose chaser. Admit it. It’s the gold you seek. And that’s okay. You’re in good company. Most of us round these parts have been searching for the big bird for ages. Some have even tagged one.
Come lear a Trick for Financing Portfolio Protection.
What is hedging? Come learn the basics in this 3-part series.
In part one of our new series on hedging, we defined precisely what the concept means. Today we’re turning to the why.
With a sound foundation on the what and why of hedging, we’re now ready to dissect the devil. Namely, when do I place my hedge?
The way that you go about hedging varies depending on what your strategy is. Come learn how to hedge a naughty naked put.
Today I want to talk a bit about the impact VIX spikes have on the cost of portfolio protection.
It’s nailing the management of Protective Puts that separates the men from the boys. Allow me to offer up a few ideas.
The bears are roaming. And while their sudden emergence likely spelled losses for traders far and wide, the pain doesn’t have to persist. I look at this as a “fool me once, shame on you; fool me twice, shame on me” situation.
Contrarians in a bear market seek signs of capitulation. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions.
Herein we explore the perks of lengthening your time horizon and embracing Long-term Investing.
Good traders keep excellent records. Quality trading journals are essential to your progress and growth as a trader and keeping good records will help you learn more from both your income and expense trades.
Learn more about HOW the Tackle Trading Journals can help you become a professional trader.
Reports [Premium Content]
The Weekly Premium Reports are a part of the PRO subscription.
Tackle Trading Playbook [FREE for PRO Members]
PRO Members now have unfettered access to the Tackle Coaches’ personal playbook containing thirty-one powerful trading strategies categorized according to the Options Greeks. Bullish, bearish, or neutral market conditions, this Playbook will help you dial up the right call more often and with greater confidence.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.