In today’s video, what we’re going to do is take a look at: can you trade covered calls with a smaller account?
If you want to learn more about covered calls, take a look at the Tradersfly website. There’s a lot of great free videos here and even great freebies. You can also take a look at trading covered calls with me for three months straight where we put on sample and example trades. All right, let’s get started here, and we’re going to go ahead and take a look at some covered calls here.
When we look at covered calls, one thing that you want to take a look at is the account size because that does help you know the larger the account size, the easier it is to kind of make more money or premium.
Understanding Covered Calls
First off, before we even continue going too far, if you’re interested in understanding what a covered call is, you’re basically buying a stock. Okay, let’s say you buy 100 shares, and then you’re renting it out or you’re selling something at an upper level.
You’re saying, “Hey, I’m willing to buy this stock at 80, I’m willing to sell it at 90.” Okay, but for waiting to get it to 90, you get to collect some money or premium. It’s kind of like they put a hold on your stock, right? So you’re willing to get rid of it at 90, and for waiting, you get to collect money.
So kind of like you bought a house, you’re willing to rent it out, and you’re kind of holding it for that time frame. Okay, but you get rent in the meantime, so that’s what a covered call is.
Account Size and Trading Covered Calls
Now, the larger the account or the more money that you kind of have, the bigger the stocks you can trade, right? The bigger the house, the more money you can collect from rent. So here the bigger the stock, the more money you can collect.
I might be able to collect, let’s say, $200 on this one every month for every 100 shares. Now, let’s say you do a thousand shares; well, it’s going to be 10 times that.
But for smaller stocks, what happens is that you can collect a lot smaller amount, so maybe you’ve got 100 shares of a cheaper stock.
Maybe it’s not a $200 stock, maybe it’s $100 stock, maybe it’s a $20 stock. You can go ahead and collect less. It might be only like $20 or $10, it seems like a minuscule amount for some people, but this is how you get started, and this is a great way to practice. Even if you have, let’s say, a $300, $500, a million, two million-dollar account, you can easily practice the concept of trading options still in this way. You know, just take it slow and do some cheaper and smaller stocks.
Example: Trading Covered Calls with Costco
So let me show you how this works if we go to the trading account here and we go into some covered calls. So let’s take a look at a bigger company and just show you okay, like if you’re doing something like Costco, Costco is a very pricey stock. It’s a $532 dollars at the time of this recording.
When we take a look at it and I want to do a covered call strategy, let’s just take a look at a 30-day out strategy, just kind of a nice baseline one-month strategy. And we go to a nice couple of points out. So we’ll buy the stock currently where it’s at, and then we’ll go out
