Bearish Covered Call Buy Back Strategy (Nearly 0% Risk) via /r/wallstreetbets #stocks #wallstreetbets #investing


Bearish Covered Call Buy Back Strategy (Nearly 0% Risk)

This isn’t investment advice in any way. Everyone should do their own due diligence before investing.

Hey everyone, I found myself in a situation like this and figured it could actually be a really good strategy to have minimum loss potential while still having good upside. Despite that, I feel like I gotta be wrong. Poke holes in my strategy. Let’s collaborate and find a way to firmly profit from this strategy while still ensuring the opportunity to wait it out and take a 0% loss.

Step 1 – Finding your Stock

You are going to need to find a stock has options and that : – Just had a big move up and you think will revert to the mean (best due to IVs) – You think will drop for other reasons – Or is just always volatile

One thing to keep in mind here, the more expensive the stock, the more you can theoretically lose. You should be able to sell calls at $1 and your maximum loss should be roughly 10%, but the underlying asset would need to crash 100% for that. You should be safe from a 90+% hit to the underlying stock.

  • The premium + sales price should always equal your total investment in the equity. That is how you achieve the minimum loss
  • Your maximum loss will always be the difference between how much you spent on equity and how much you get for the call premium

Step 2 – Finding a good entry

  • For something that just had a run up I like to see 2-3 indicators that it will be quickly retracing. This includes RSI, Stochastic RSI, MACD, Volume, and other typical mean reversion indicators. I also always make sure there isn’t any news that would validate the large move upward.
  • For volatile stocks I’d look to enter on a day when the stock goes up 5+% and is overbought. I also study the chart a bit for consolidation breakouts, to scan for resistance/supports on the 50/100/200 day EMAs, etc.

Obviously this is just basic analysis stuff and what I choose to do.

Step 3 – Selling a covered call

Your goal should be to immediately recoup as much of your expense on the stock as possible. I shoot for 90%. So if I buy 100 shares for $10 each I want to sell a $1 call for a $900 premium. This means when it expires and gets exercised you’ll get your other $100 back.

For example, won’t let me add the screenshot to post, but right now I’d be able to buy 100 shares of GOGO for $950. Immediately after I’d be able to get $850 back for the right to buy the shares for $1 each on November 20th (10 days from writing this). My premium of $850 paid immediately and $100 paid to me for the shares upon expiration equals my entry of $950.

So we’ve established the near zero downside, but where is the upside???

Step 4 – Buying back your call

As options traders we all know that options are inherently leveraged. The goal here is when your underlying equity drops, the options contract should drop 5-10x as much in percentages. Once there has been a substantial dip (I shoot between 2.5% and 5%), you simply buy back the call. You can sometimes get it as little as 1/2 the price depending on IV, Delta, Gamma, and expiration date. Let’s give an example.

Lets say I buy 100 shares of “Umbrella Company”, we’ll makes its ticker “UC”

This is UC’s all time high and has hit this psychological price barrier of $10. The sentiment isn’t good as it goes back and forth from $9.90-$10.10. Naturally it is also overbought at this point and so naturally I pay $1,000 for 100 shares at $10 each.

I immediately sell a $1 covered call that’s 4 moths out for $900. I do this immediately while the equity rallies to ensure a hefty premium. My balance is $900 and in 4 months on expiration I get another $100. Within 3 days the stock slips 10% to $9. My stock equity has dropped to $900, but the options contract has dropped to $700 due to lack of faith in the long term prospects of the company. People are scared.

I buy back the contract with $700 of the $900 premium, leaving me with $200 cash; then sell the stock for $900. End of the day I have $1100 cash. I had a maximum loss of $100 that would only even happen in the rare event that the equity drops 90%, something highly unlikely.

Look forward to hearing some feedback!

Once again, This isn’t investment advice in any way. Everyone should do their own due diligence before investing.

Submitted November 11, 2020 at 03:42AM by Sidney4198
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