With this article being financial related article please understand that none of this is a recommendation. Options, stocks and ETF's are risky and have the possibility of going to $0.
I have been hesitant to share more complicated investing strategies as since starting the NextLvl I haven't really talked about my investing strategy as a whole. In the past few months stocks have dropped a bit, and very well could drop some more. Regardless of the direction stocks go, there is always a way to make money. You just need to know where to look.
DISCLAIMER: For this method you will need roughly $1,200 in capital.
Learning About Options
For those who don't quite understand how options work when it comes to stocks its okay! By no means am I an expert, far from it, but I was always curious about what they were and how it worked. Trying to explain what they are and how they work is not an easy task.
Selling Covered Calls
Selling covered calls are a very popular strategy. However, it typically isn't utilized by retail investors due to capital requirements as you would need to own 100 shares of a certain security (stocks, ETF's, ect...). For example if you wanted to try this strategy with Microsoft, since their share price right now is roughly $300 and you would need 100 shares in order to sell a covered call, you would need $30,000.
Whereas if you wanted to do this strategy cheaper priced stock such as Nokia which is currently trading around $5, you would only need $500.
A covered call is a "financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities".
Essentially you are agreeing to sell your shares at a certain price on a certain date and are going to get paid for it.
At this point, I am hopeful things are starting to make sense and you are probably wondering what's the catch and what are the risks. Both great questions!
The catch is that in the event the security (stocks, ETF's, ect...) go above the price you agreed to sell it for, you don't get any of the excess profit. It's gone. While it is almost impossible to accurately predict what the price of something might be at a certain time, with this strategy you have the advantage of choosing the date and price you are comfortable with.
The risk is that the stock or ETF has the ability to go to $0. Because of this, the most important key to this strategy is to ensure what you own is a quality asset that you believe in. You want to use something that has growth potential but that won't lose to much value.
Going back to my previous example of Microsoft and Nokia, Microsoft is one of my favorite companies. I believe in their future as a company and plan to hold their shares for a long time. Nokia on the other hand...
That brings us to METV. I actually made an article talking about my thoughts on METV not to long ago, which at the time was still META before Facebook bought the ticker. The price has since came down dramatically and I decided to pull the trigger and buy my first 100 shares at just under $12.
I would highly encourage you to look further into METV before making any decisions to really know what you would be getting into. A list of their holdings and additional information can be found here.
METV is a great for selling covered calls for a few reasons
Growth. Of the 48 companies which make up METV, the majority of them are growth companies. This is important because in most cases the higher potential growth of a stock the more expensive options will be.
Diversification. While it is important to note that diversification doesn't guarantee safety, having diversification can be beneficial. At the same time gains are capped.
Price. There are no other ETF's that are compiled like this, near the same price that I am aware of. Having a lower price is essential for investors with limited capital who want to use this method.
There are many ways to do this and I would recommend finding a way that works best with your investing goals/strategy. I am specifically going to discus this method with METV but it can be used with any security with options available.
1.) Buy 100 Shares
The first step is going to acquiring 100 shares. My advice for this would be to buy on red days if possible but honestly whenever or whatever price you are comfortable with. You don't have to buy all 100 shares at once and there are many ways to do so. If you are patient you can even sell puts, but that is a discussion for another day.
2.) Find a Contract to Sell
There are many different ways to do this. I would encourage everyone to have their own strategy depending on the amount of risk. There are a wide variety of contracts that date all the way out to December. You can sell in the money or out of the money covered calls, which are both great strategies and have their own purpose.
3.) Sell & Wait
With this strategy there are a wide variety of outcomes. Essentially either 2 things will happen. The contract will expire out of the money and thus be worthless. You keep all the original premium and shares. Or, the contract will expire in the money, in which case the contract will be exercised. In this case you still keep the original premium but the shares will be sold at the strike price the contract was at.
First of all, you need to be 100% all comfortable with whatever stocks or ETFs you decide to do this with. Stocks and ETF's can be very volatile which can be a good thing when selling premium.
I personally have been selling contracts 1-2 months out and $1-$2 above the current price. As seen in the image above I would likely sell the April contract at $0.50. Wait for green days if possible. Call premium typically increases when stocks or ETFs do well and decrease when they do bad.
Don't feel confident or comfortable? Paper trade. Paper trading in 2022 is still a great tool for every investor no matter their experience.
To wrap things up, I think selling covered calls are a great investing strategy. With the premium made I plan to reinvest and repeat this strategy. I would love to make some more detailed post about this and give updates along the way. Let me know your thoughts and if you have any experience selling covered calls.