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

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.