My TOP Option Strategy for CASHFLOW

Covered Calls

The presenter explains covered calls as a way to generate option premium while holding shares, comparing the premium to rent collected on an investment property. The strategy involves owning the underlying stock and selling a call option against it.

If the stock stays below the strike price through expiration, the call may expire worthless and the seller keeps the premium. If the stock rises above the strike, the shares may be assigned and sold at the strike price, limiting further upside.

Illustrative Examples

• JRY example: With JRY at $50, the presenter sells a 30-day $55 call.
  • If the stock is at $52 at expiration, the call expires worthless and the seller keeps the premium.
  • If it reaches $60, the seller may have to deliver shares at $55.
• Covered-call example: The presenter owns 100 shares bought at $45, with the stock at $50, and sells a $55 call for $2 per share.
  • The $200 premium provides a cushion against a modest decline and reduces the stated cost basis from $45 to $43 per share.
  • If assigned at $55, the shares are sold at a profit, and the premium adds to the return.

These examples are hypothetical; JRY is not identified as a real ticker.

Strategy and Selection Framework

• Sell calls only against shares already owned. Standard option contracts generally cover 100 shares, so the presenter prefers positions held in 100-share increments.
• Typically choose 15–30 days to expiration, rarely going beyond 40 days.
• Look for calls with roughly 15–30 delta. The presenter treats delta as a rough guide to assignment likelihood, not a certainty, and says these strikes balance premium with the chance of shares being called away.
• Check the chart, upcoming events such as earnings, and option liquidity. The presenter prefers open interest in at least the hundreds and a relatively tight bid–ask spread.

In one example, the stock is at $54.20, earnings are due in less than a week, and a $65 strike is about 20% above the share price. A proposed premium of $1.55 per share ($155 per 100 shares) is nearly 3% of the share price. The presenter says premiums near 2% are attractive to him and calculates that repeating the example every 30 days could exceed 34% annually. This is an illustrative, non-guaranteed extrapolation.

Managing the Position

• Stock falls: The call may become cheaper to close. The presenter weighs buying it back and opening a new call against holding it to expiration. He describes lowering the strike and extending the expiration as “rolling down and rolling out.”
• Stock moves sideways: He may let time decay work in his favor or roll out to a later expiration at a similar strike.
• Stock rises toward the strike: He may accept assignment or buy back the call and sell a later-dated call at a higher strike. Rolling can require paying to close the original call and does not guarantee a net credit.
• Stock rises sharply: The shares may be called away, giving up gains above the strike. The presenter emphasizes that, in his example, the sale would still be at a profit.

Risks and Cautions

• A covered call does not protect against a severe decline or a stock going to zero. The premium provides only a limited cushion, and the underlying stock risk remains.
• The main trade-off is capped upside in exchange for premium income. A sharp rally can leave the investor with less upside than simply holding the shares.
• Repeated premiums, assignment outcomes, and the example’s annualized return are not guaranteed.
• The presenter says he would avoid the approach for stocks he expects to make explosive moves. He also notes that dividends could add to cash flow.

Disclosure: The presenter states that the video is for educational purposes only and is not financial advice.

Presenter/source: James Rich Young (channel: James Rich Young)