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April 27, 2022
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How To Trade Rising Interest Rates With Options

Wednesday, May 4th
4:30 pm ET / 1:30 pm PT

Listen in as Option Hotline Chief Options Strategist, Keith Harwood, discusses options trading at this free webinar. Interest rates are rising as inflation concerns hit the markets. With 30-year rates at 3-year highs and the Fed looking for ways to fight rising consumer prices, equities are showing increasing weakness and signs of worry.

Could we be ready for a major market correction? Or is this simply another dip and buying opportunity? With fear comes opportunity, but defining risk is critical in times of uncertainty.

Please join us as Keith outlines how he approaches these insecure times and uses options to leverage uncertainty to increase his potential profits in times when others are panicking.

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Tomorrow, you could begin doubling your account every single month starting with one letter.

The letter will come from a 20-year trading professional named Ian Cooper. He says, “In 2022, following my trades you would be doubling even tripling your account some months. Let me show you how.”

He will show you exactly what to do... and he’ll give you the blueprint for just $1.

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Covered Calls - Extending Your Rate of Return
by Dan Keen

You can put the icing on the cake by using a few tricks to increase your rate of return on a covered call play.

Buy More than 100 Shares – And Write More than One Contract

It is typical for online brokerage firms to charge one low rate for the purchase of up to several thousand shares of a stock. It is also common practice for them to allow several option contracts to be transacted for the same fee. For example, you can trade up to eight option contracts and still only pay $14.95, then a mere $1.75 is tacked on for each additional contract.

Since you only pay commission to buy stock once (usually up to several thousand shares), and commission to write the covered call once (usually several contracts), the rate of return for a play can be increased by purchasing 200 shares (or more) instead of 100 and writing two or more calls. This will result in a higher rate of return on your investment. The fly in the ointment is, of course, that you must have the money necessary to buy the additional shares of stock.

Let’s take a look at a typical play and see how it would affect our rate of return if we sold two contracts instead of one. Suppose we find a stock that we have a slightly bullish opinion on, selling for $9 a share. The bid price for a $10 strike price for next month is $0.75. Assume our online broker charges $8 to buy a stock and $1.75 per contract for an option trade, with a $15 minimum.

Buying 100 shares will cost: ($9.00 x 100) + $8.00 commission = $908.00

Writing a covered call would give us a premium of ($0.75 x 100) - $15.00 commission = $60.00

The percent return on our investment is (profit/cost) times 100, ($60.00 / $908.00) x 100 = 6.6%

What if we purchased 300 shares of the stock and wrote three contracts? The commission fee remains at $8.00. ($9.00 x 300) + 8 = $2,708.00

We can write up to eight option contracts with our broker for $15, since they charge $1.75 per contract, with a $15 minimum fee, ($0.75 x 300) - $15 = $225.00 - $15.00 = $210.00

Our return on investment, then is ($210.00 / $2,708.00) x 100 = 7.8%

This is not a dramatic example, but it did return an extra percent in the same short period, perhaps just a few weeks. It also demonstrates that commission fees are an important consideration in determining our return on investment.

Buy on Dip, Write on Rise

Buy the stock on a dip, but don’t write a call until the price rises. The twist to this strategy of writing covered calls is to purchase a stock you anticipate will go up in price, but wait until it actually does before writing the call. Buying a stock and not writing a covered call on it right away adds some risk, of course, since the stock may go down and you didn’t even get any premium money to help offset a price drop. But if your research points to a rise in the near future, consider buying the stock now, holding it until the price appreciates, and then writing a covered call, either with an in-the-money strike price or the next strike price above the current stock price (thus collecting more money if called out).

Choose a Longer Time until Expiration

If you are willing to tie up your money longer, look at the premiums for three and four months in the future. The more time there is until an option expires, the higher the premium will be, because there is more time for the stock to reach that goal. There is an increased risk, however, that you will be called out, so you must be prepared mentally to lose the stock.

Be sure you are paid well for taking on this extra risk and tying up your money longer. Run through the calculations to figure percent return on your investment. Is the extra risk and time your money is tied up worth the increased premium?

Use Volatility to Your Benefit

Look for stocks with a beta greater than one. When volatility is high, it is a good opportunity for option writers because premiums will be higher.

Search for High Premiums

Every month there are dozens of covered call plays that will return 10%, 15%, 18%, even 20% on your money in a month! You have to do your due diligence and search for them. Stocks with recent volatility or that have a hot news story released on them will pay higher premiums. Of course, when premiums are abnormally high, there may be increased risk in playing that stock. Somebody must know something you don’t, and that something could work against you!

Let’s use the following as an example: In December of 2010, we bought 100 shares of Sunrise Technologies (SNRS), which manufacturers laser systems for optomology. The average daily volume was 1,500,000, ensuring plenty of liquidity. Institutions held 11% of the stock shares, and the stock was leveling off after a recent run up. We bought the stock at $12.50 and wrote a covered call for one month out (Jan expiration) with a strike price at-the-money, at 12.50. The premium paid was $2.75! Do the calculations to check this huge return on investment:

Stock Costs $1,250.00 + $8.00 commission = $1,258.00.

Income from writing covered call = $275.00 - $15.00 commission = $260.00

Return on investment (profit/cost) x 100 = (260.00 / 1,258.00) x 100 = 20.7% in four weeks!

Judging from a chart on SNRS, the stock looked like it was taking a breather after a recent run up, so we didn’t feel like we were limiting our upside potential too much by writing a covered call only four weeks out. There was a good chance we could get called out, though. This would mean another commission fee of $15, but that would still yield a 20% return! Why was this premium so high? It became public later that another company was making an offer to buy SNRS. Someone obviously had knowledge of that activity, causing the option premiums to be unusually high. There was a spike of trading activity and then, when the deal must have fallen through, the stock started a downward trek that, six months later, had hammered it down to about half the price it was in December.

Although it is wise to search for stocks paying high premiums, the point here is to be careful when a return is really high, reaching 20 % or more in a month. The underlying stock must be extremely volatile, and there must be a reason.

 
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