FORGET COVERED CALLS - THIS IS BETTER | TRADING OPTIONS

Introduction

This tutorial explores a trading strategy that could potentially outperform traditional covered calls when trading options on platforms like Robinhood. It's essential to understand how both buying and selling options work before diving into advanced strategies. This guide will outline actionable steps to maximize your trading success.

Step 1: Understand Options Trading Basics

Before implementing any strategy, familiarize yourself with the fundamentals of options trading.

• What are Options?

  • Options are contracts that give you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specified date.

• Types of Options:

  • Call Options: Contracts that allow you to buy an asset.
  • Put Options: Contracts that allow you to sell an asset.

• Key Terms:

  • Strike Price: The price at which you can buy or sell the asset.
  • Expiration Date: The date when the option contract expires.

Step 2: Compare Covered Calls with Alternative Strategies

Evaluate the limitations of covered calls and explore superior alternatives.

• Covered Calls Overview:

  • Involves holding a stock while selling call options against it.
  • Generates income through premiums but limits upside potential.

• Alternative Strategy:

  • Consider strategies like cash-secured puts or vertical spreads, which may offer better risk-reward profiles.

Step 3: Implement a Cash-Secured Put Strategy

Cash-secured puts can be a great alternative to covered calls.

• How It Works:

  • You sell put options while holding enough cash to buy the underlying stock if assigned.

• Steps to Execute:

  1. Identify a stock you want to buy.
  2. Analyze the market to determine a suitable strike price and expiration date.
  3. Sell the put option and collect the premium.
  4. If the stock price falls below the strike price, you will buy the stock at that price, effectively getting it at a discount.

Step 4: Use Vertical Spreads for Risk Management

Vertical spreads can help manage risk while leveraging potential gains.

• What is a Vertical Spread?

  • A strategy that involves buying and selling options of the same class (calls or puts) on the same underlying asset with different strike prices or expiration dates.

• Steps to Implement:

  1. Choose a bullish or bearish outlook.
  2. Select two strike prices for the same expiration date.
  3. Buy the option with a lower strike price and sell the option with a higher strike price (for calls) or the opposite for puts.
  4. Monitor the trade and adjust as necessary.

Step 5: Utilize Analytical Tools

Enhance your options trading strategy with analytical tools.

• Recommended Tools:

  • LuxAlgo: For technical analysis and market insights.
  • OptionStrat: For strategy analysis and risk assessment.

• Tips for Using Tools:

  • Leverage these tools to backtest your strategies.
  • Analyze market trends and volatility to make informed decisions.

Conclusion

In summary, while covered calls can provide a steady income stream, alternative strategies like cash-secured puts and vertical spreads may offer better opportunities for profit with managed risk. Familiarize yourself with options trading basics, compare different strategies, and utilize analytical tools for improved trading decisions. As you gain experience, continue to refine your approach and stay informed about market conditions to optimize your trading outcomes.