Stocks & Options: COVERED CALL AND COVERED PUT STRATEGIES | Scott Reese | Skillshare

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Stocks & Options: COVERED CALL AND COVERED PUT STRATEGIES

teacher avatar Scott Reese, Engineer & Investor

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Taught by industry leaders & working professionals
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Lessons in This Class

4 Lessons (42m)
    • 1. Introduction

      2:07
    • 2. The Covered Call

      23:26
    • 3. The Covered Put

      16:00
    • 4. Wrapping Up

      0:49
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About This Class

Covered calls and covered puts are the superior alternative to simply buying and selling stock. When trading stock by itself, you are restricted to only being able to make profits under one single scenario. The stock price must increase (if you buy stock) or the stock price must decrease (if you short sell stock). 

Covered calls and covered puts, however, provide the trader the opportunity to make profits in multiple scenarios! In fact, you have a much greater chance at making money with these strategies than with trading stock by itself!

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Scott Reese

Engineer & Investor

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Transcripts

1. Introduction: When it comes to trading stock, you only have two options. You can either buy stock or you can short stock. Two options. In each option only gives you one way in which to potentially make a profit, right? For example, if you buy stock, the only way to make money is that the stock price increases. If you buy stock at a price of 50 bucks per share and the price goes from 50 to 55. Well then there you go. You've made $5 per share, right? Short-selling works in the same way, but just the opposite. And I'll talk a lot more about what short-selling is in this course. But you are essentially trying to make money when stock prices go down. But again, that's the only way to actually make money with that kind of position, the stock price must decrease with a covered call or a cover PUT whoever, which is the focus of this course, that is not the case. And that's because these kinds of strategies combine both stock in options together to give you the opportunity to make money in a variety of different ways as opposed to just one single way. So in essence, when you are using a covered call or recover put, you are dramatically improving your chance or your probability of actually turning a profit on the trade. And as an options trader, my entire trading strategy is based entirely. For probability. I can make money when stocks move in any given direction, up, down, sideways, it does not matter. And a covered call and a cover put work in a very similar way. And if this is the first course of mine you've come across. My name is Scott worries. As I just said, I'm an options trader as well as a software engineer and the family services industry am an entirely self-taught and self-directed investor and trader in the stock market. And it's my goal here with his town that I've created on skill share, tell people like you also become confident in self-directed investors and traders also. And one less thing to know before we get started here is this course does require just some very basic knowledge on how options work. So as long as you have just a fundamental understanding of what a call option is and what a put option is. You'll be totally fine working through this course. But if you are brand new, however, to options, then I would suggest you first watch my introductory course called stock market options introduction. I'll teach you exactly how options work and when you're done with that, you can come back to this course and continue forward. So with that being said, let's hop over to the computer and start talking about the cover call. 2. The Covered Call: All right, welcome to the first video of this course on covered calls and cover puts. And I hope that by the end of this course, you will also agree in that these two strategies are going to be a much better way or a much better alternative to simply buying and selling stock. And that's because as you will see throughout this course, the cover call and the cover put offer significantly more advantages that just outright buying stock or short selling stock simply do not offer. And so to kick things off here, in this video, we're going to talk about the covered call position. And this is going to be a bullish strategy. So ideally, the stocks that we are using for these covered call strategies, we would like the stock price to go up in price. That's how we would make the most profit. But as you'll see here, that is not actually have to happen in order to still make a profit. So coming over to the next slide here and first going to walk you through the basics of what a covered call is and how it works. And then I'm going to slide over to my trading platform and walk you through a demonstration of actually how to utilize one of these strategies in the real marketplace. And so cover calls and also cover puts that you'll see in the next video have two main components, or two main things you'll have to do to actually put on one of these positions. And the first step is going to be simply buying shares of some stock. In this case, I just put XYZ as the ticker symbol, meaning any stock that you have a bullish assumption on. And the only constraint here is you're going to have to by increments of 100 shares. So either just buying a 100 shares of stock or 200 shares, 300 shares for a 100 and so on and so forth. And that's simply because in the second step of this cover call strategy, where we're gonna be dealing with call options. Call options as well as put options also deal in increments of 100 shares of stock. And you'll see a lot more of how this works in a minute. But the good news is, depending on the kind of trading account that you have. Specifically, if you have a margin account, you can actually significantly reduce the cost of purchasing these one hundred and two hundred and three hundred shares of stock. And again, my demonstration here in a minute, we'll show you exactly how this works. So that's the first step. Simply buying a certain quantity of shares of some stock that you are bullish on. And so the second step is going to be selling a call option now with a strike price that is higher than the price at which you bought the shares for. And so that means this call option will therefore be out of the money. That's what OTM stands for, out of the money. And you do have some flexibility here in terms of the further out of the money you sell this call option, the more risk you're going to take on, but also the more potential profit or more reward you could gain if you are correct in your bullish assumption here. Now the one major caveat or downside, and I wouldn't even call it a downside, to be honest, of this particular strategy is that you do have limited profit potential. Meaning and just thinking about this in comparison to only buying shares of stock and doing nothing else. If you just buy shares of some stock, there is no limit to how much profit you can make if the share price is just keep on increasing and going higher and higher and higher, you will keep making more and more profit. And so with a covered call, however, there is no possibility of making theoretically infinite profit. But in exchange for this limited profit potential, you do gain significantly more ways to actually make profit with this kind of strategy. And as they walk you through here are the different ways to actually profit with a cover call. Just keep in mind what would happen if you had only purchase shares of stock and didn't nothing else. So the first way you can make profit with a covered call is simply if the stock price goes nowhere. And I have by exploration here to be specific, meaning when the call option that you've sold simply reaches the expiration date. So if the stock price goes nowhere by option expiration, you can still make profit. And again, comparing that to if you just purchased shares of stock and did nothing else. If you bought shares at 52 months from now, the stock price is still at 50. Well, you didn't make profit. You didn't lose money either. But obviously there's nothing to really get excited about when you have to walk away without making any money. So with a covered call, even if the stock price goes absolutely nowhere by exploration, you can still make money. The second way is if the stock price does go higher and you're bullish assumption was correct, then of course, you make profit and this would be the ideal scenario. This is how you would make the most amount of money. But as I just explained, this does not have to happen for you to still actually make some sort of profit. And the third way you can still make money with a covered call position is even if the stock price goes lower by expiration. Now this is only up to a point. But even if you're bullish assumption was completely wrong and the stock price actually went down by option expiration, you still have the opportunity, the chance to walk away with some profit. And again, keep in mind here, comparing this once again to just buying shares of stock. If you bought shares at 50 and the stock price drops a 4999, then automatically you are down money with a covered call. That wouldn't be the case. So right off the bat here, I hope you can see just on a high level from my explanation on the slide that it covered call position offers significantly more advantages. Just buying and holding stock. You do have that trade-off of only having limited profit potential. But in my opinion, being able to still make money if the stock price goes nowhere or even lower by expiration, that more than compensates the limited profit potential. So now to give you a demonstration of how this works, I'm going to slide over to my trading platform here. And I know there's a lot of stuff going on here, but I just want to direct your attention to this price action chart right here. And specifically this is a price action in chart for the company Twitter. And I pulled up Twitter stock here because this might just be an example of some stock that you might be bullish on. You can see after the earnings announcement happened, which occurred right around early November or late October, the stock had a massive, massive drop. And you can see since then has had a little bit of a balance, a little bit of a rebound, but it's still significantly lower than where it was before the earnings announcement. So like I said, this could be a great candidate for a cover composition because I covered call is going to generate the most profit when the stock price actually goes up. And so now if I wanted to go forward and implement a covered call strategy on Twitter here, the first step is buying is certain quantity of shares. And remember it's going to be in increments of 100. So just to make things simple, here, I'm going to purchase 100 shares of Twitter. So I can just come over here, click this button and go to buy. And that brings up an order interface down here. And by default, it goes to 100 shares already. And I do have control over the price at which I can actually purchase these shares for. And so right now Twitter is trading for a price of around $43.58. They'll maybe I don't want to pay more than $53.50. So I can set this limit order to do so, and then I can hit Confirm incent. And because it's at the limit price a little bit lower than where the stock is currently trading. I may have to wait a few minutes or maybe a bit longer for the stock price has dropped a little bit. But even if Twitter does not actually come down to 4350, I can always cancel and replace this order with a new limit price a little bit higher, maybe 4355 or I can just go all the way up to 4358 where the stock is trading at by do you always like to try and into a position with the absolute best price possible. And so for the sake of this example here, and let's just assume that when I do confirm incentives order that I do get filled at $43.50 per share. Now before I continue here, I do want to touch on the fact that I can use margin to actually significantly reduce the cost of actually buying these 100 shares of Twitter. Where I, because if the stock is trading for or if I want to buy these shares at 4350, that means 100 shares is going to cost 4,350 bucks, which is definitely a bit of a tall order. However, if I do hit Confirm and send here, even though it says the cost of the trade, including commissions and there's actually no conditions for stock trading. Basically just the cost of the trade. Even though it says 4350 bucks. If you look at the buying power effect, this is the actual amount of capital of my own money. Then I'm going to have to put up to hold this position is only one hundred, three hundred and five dollars, which is only 30% of the true total cost of this trade. And so what this means is the other 70%, the other $3 thousand or so, I'm actually going to be borrowing from my broker. And then that amount plus the 1300 that I have to put up myself will obviously equal to 4350 necessary to actually purchase 100 shares of Twitter. This is why if you are considering or you are interested in doing cover calls and cover puts, I would definitely recommend considering doing them in a margin account. And so at this point, I would just hit send. And like I said, just for the sake of this example here, let's just assume I do get filled at my limit price of $43.50. And then boom, I have completed the first step of my cover call position on Twitter. And so now the next step would now be to sell an out-of-the-money call option on Twitter. So I can come over to the Trade tab now. And what you're seeing right here, this is the option chain for all the options that I could be buying or selling on Twitter. And they're organized but all the different expiration dates. And some maybe my assumption is I'm gonna give Twitter stock to full months to rebound back to maybe around $48 per share. I don't think it's going to rebound all the way to the highest price of 50 to 93. But perhaps a bounce from almost down to $38 per share, up to back around 48, right around here. I think that's pretty reasonable. And so what this is going to mean is I'm going to now select call option with the strike price of $48 per share. So coming back to the trade tab now, and again, if I'm gonna get myself around two months for myself to be correct, or two months for Twitter to actually bounce all the way to 40 bucks per share. Then I can come to these january expiration contracts. You can see they expire on January 15th, 2021. Which as of today, at the time this video was recorded, is about 62 days for now. So I'll click on this tab to expand it and scroll down a little bit. And on the left-hand side here, these are all the different color options that I can be trading on Twitter. And on the right-hand side, these are all the different put options. And you can see in this column right here, these are all the different strike prices of all of these different options that I can be trading, all of which expire on January 15th. And it's like I said, if my assumption is that Twitter's going to rebound up to maybe around 48 bucks per share. Then I'm going to want to sell an out-of-the-money call option with the strike price 48 bucks per share. And so just as a refresher on what this kinda position means is that if a call option, at least from the buyer's perspective, if I were to buy this call option, that would mean I have the right to purchase 100 shares of Twitter at the strike price, at 48 bucks per share by the expiration date, right? And it would only make sense to do so if Twitter was actually treating above $48 per share, you know, for example, if by January 15th, if Twitter was at 50 bucks per share, then it would be very advantageous to use this call option to buy shares of Twitter at 48 and then sell them in the market at the current price of 50, right? But again, that's all from the buyer's perspective. In this case, we are actually the ones selling this call option. And that would mean we would have to actually sell 100 shares to the option buyer come expiration if indeed Twitter stock was trading above $48 per share, right? The call option buyer always has the quote, unquote option or the right to purchase a 100 shares of stock. But the seller of this option has the obligation, they are required to sell 100 shares to the option buyer if that buyer decides they want those shares. And so fortunately for the cover call position, we're already going to have a 100 shares of Twitter in our portfolio because that's the first part of actually putting on a covered call position, right? And so now if I set up an order to sell this call option here, you can see that I'd be able to do so for right around 160 bucks per share. Just looking at the bid and ask price here, the bit is 108, the ask is one, 63. So going kind of in between about 160 would be the fair price to sell this call option four. And so at this point I would hit Confirm and send. And once the order is placed and I get filled, then I'm completely in my cover call position on Twitter. And so now let's walk through a couple of different scenarios of how we can make or potentially lose money on this particular cover Call. And so the first scenario is going to be what happens if by exploration in 62 days? Basically, what happens if Twitter stock just goes nowhere? And if he bought it 4350, and by January 15th, it was still right around 4350. What happens while the stock component of this covered call would not generate any profit, right? Because obviously if you wanted to just Gao this position than if we sold these shares for the same price we bought them for. Then in the end, we don't make or lose any money. But don't forget that we still sold this call option for $160. And if Twitter stock doesn't go anywhere, if it's still hangs, read around $43.50. That means this call option with strike of 48 bucks per share would be absolutely useless by exploration. Right? This call option is only useful if Twitter stock is trading above the strike price of 48 bucks per share. And so that means this call option is just going to expire worthless. It's going to just disappear. But we'll still get to keep the full 160 bucks that we sold the option for. So even though we didn't make any money on the stock portion of this cover call, we still made a 160 bucks on the option portion of it. And comparing this to just buying a 100 shares of stock and doing nothing else. Well, in the case where the stock price doesn't move at all, we don't make any money. We don't lose any money. But who really cares about that? Write the goal obviously as always, to make money and just outright buying stock and doing nothing else only gives you one possible way to make money. The stock price has to go up with a covered call, definitely does not have to happen. Let's move to the next scenario. Let's say come exploration by January 15th, Twitter does actually rally a bit, and it comes from 4350 all the way to right around, let's say, $47 per share. So just a little bit short of our target price of 48 bucks per share. So in this scenario, both our stock portion of this cover call and the option portion would both generate profit because looking first at our stock position, if we bought shares at 4350 and now they're trading for $47 per share. That would be a profit of $3.50 per share times 100 shares that we have in our portfolio. That's a total profit of 350 bucks. And then on top of that, because the shares are trading for less than the strike price of our call option. Once again, this option expires worthless. It just disappears, but we still keep the full 160 we sold it for. And so if we made 16T on this call option and we made 350 on our stock. That means together we walk away with an over $500 profit. But now what happens if Twitter has a Monster Rally and it blows through our call strike and goes all the way to maybe 50 bucks per share. And if this were to happen, this would be the scenario where the unlimited profit potential of the cover call comes into play. And let's think about why. Well, because we sold this call option with the strike price of 48, that means we have to sell 100 shares of Twitter and a price of 48 bucks no matter what. And so if my exploration Twitter was at 50 bucks per share, that would mean the call option buyer would then be incentivized to use the call option to purchase 100 shares from us at a price of $48 per share and then immediately sell them in the market at a price of 50. And so no matter how high Twitter goes above 40 bucks per share, we're always still going to have to sell our shares at exactly 40 bucks because that's the agreement that we enter into when we sold this call option. But as you'll see here in a second, the profit we still get to make on this kind of scenario is still very, very significant. So looking first at the stock portion of this covered call, if you bought the shares at 4350 and we have to turn around and sell them at 48 because the option buyer wants to use the option. That would still be a gain of $4.50 per share, right? Buying a 4350, selling it 48 as a $4.50 profit per share times 100 shares, that's a $450 profit. And moreover, just because this call option got used against us and we had to sell our shares at 40 bucks, we still get to keep the $160 price that we sold it for. So if we still keep the 16T on this call option, and we add that to the 450 bucks we made on our stock. That is a total profit of over $600. And if you think about that in terms of a percentage return on capital, right? If I had to put up 1300 bucks to buy these 100 shares of Twitter for. And in fact, I'll pull up the calculator here to show you this. And so if our profit is $610, that's the exact amount that we would profit in this kind of situation here. And if I divide this by the amount of capital I had to put up to actually hold this position, which was right around 1300 bucks. This would be a 47% return on capital. So even though we don't get to participate on the additional gains if Twitter moves above 48 bucks per share, still walking away with a 47% return is more than I could ask for. And just for comparison here, if I instead did not have a margin account and I had to put up the entire 4350 bucks to hold this position. My return on capital is only going to be about 15%, are actually about 14%. So still definitely a great return. By all means, a 14% return is phenomenal. But obviously, as you can see, by using margin, the return on capital you can generate can be significantly higher. And so now however, what happens if Twitter stock actually falls and praise our bullish assumption was completely wrong and come expiration on January 15th, twitter actually moves down in price. Let's say we were only slightly wrong. And Twitter falls from 4350 down to 40 to 50. Well, in this scenario, looking at our stock position first, if you bought 100 shares at 4350 and we wanted to sell them to get out of this position at 4250, that would be a loss of $100. But again, don't forget, we still sold this call option for 160 bucks. So if we lost a 100 bucks on our stock position, but we gained a 160 bucks on our option position. That means in the end we still walk away with a $60 profit. And again, comparing this two, had you just bought a 100 shares of Twitter and done nothing else. The moment the share price drops one penny below the price where you bought it, you are automatically down money, right? But because we always have this call option, we will always be able to use the money we sold this option for to help offset any losses that we incur on our stock position. Now of course, this is up to a point, right? We only have 160 bucks to offset any losses. So of course, if our losses on the stock position exceed 160 bucks, then in the end, this cover call is going to actually lose money. But at least you still have some nice buffer, some nice wiggle room to still be wrong, to be completely wrong about your assumption, and yet still walk away with a profit or maybe just break even. Twitter can drop a full $1.60 below the price where we bought it for. So that'll be dropping from 4350 down to $41.90. In that situation, we would lose exactly a 160 bucks on our stock position. We would gain a 160 on our option positions. So net-net In the end, we walk away just having broken even. But obviously still a much better outcome than just bind stock by itself and just having to walk away with a loss of a 160 bucks. Now the last thing I want to mention here before I wrap this video up is you don't actually have to wait until exploration to actually take your profit or cut your losses for this kind of position. For example, let's say only two weeks from now, 14 days. Twitter does have a pretty nice rally, and it does go from 4350 all the way up to our target price of 40 bucks per share. And if you wanted to simply get out of this entire cover called position and take your profits, you could certainly do so. However, you're not gonna be able to capture the full maximum amount of profit than if you were to wait until expiration. And the reason for that is because since there's still so much more time left exploration, right? As of right now there's 62 days left to go. So 14 days from now, if Twitter's already at 40 bucks per share, that means there are still 48 days left to go until expiration. And because of that fact, this call option here is not going to be worth $0. In fact, it's actually going to be worth more than the 160 bucks that we sold it for. So in this scenario, it may not be trading for 160 anymore. It may actually be trading for over $300. So if you do want to take your profits early, you are going to have to buy this call option back for a loss. And as an example here, if I pull out the calculator again, if we initially sold this call option for a 160 bucks and let's say we had to buy it back. That's how we close out of this option position. If we buy it back at a price of $300, that means we're going to lose a 140 bucks on just the option portion of this cover call, but of Twitter stock is now treating for 48 bucks per share. That means on our stock portion of this cover call, we're going to make 450 bucks and profit. So we add onto this 450. That means we still get to walk away with a $310 profit, right? Like I said, we're not gonna be able to walk away with a full maximum amount of profit if we are getting out of this position early, the only way to capture the full profit is to wait all the way until expiration date. And that scenario, either this call option is going to expire totally worthless, right? If Twitter is below 40 bucks per share, in that case, we keep the full 16T or Twitter trades above 40 bucks per share, which again means the option buyer's going to purchase 100 shares from us that we already have in our portfolio and we still get to keep the full 16T. But up until that point, as long as this option is trading for more than $0, then if we do want to get to this position early, we're going to have to buy it back for a price obviously more than $0, which would mean we're not going to capture the full 160 bucks here, especially if we're getting out very early. And this option is actually trading for even more than would be sold at four. But fortunately, the loss in money from the call option portion of this cover call will be more than compensated, more than offset by the gains from the stock portion. So just wanted to make that clear before wrapping this video up, you don't actually have to wait until the very end. You can simply sell your 100 shares back in the market and close out that portion of the physician. And then you can buy back the call option for whatever price is trading for to close that part of the position. Once you've done both those things, you are officially out of that covered call and say, I believe that covers it for this video, I hope this demonstration here gave you a great example of how to actually use a covered call in the real marketplace and gave you an understanding of how all the different outcomes are going to work in terms of making profit or potentially losing money. But I hope you can see by now the huge advantages that come with using a cover called as opposed to just buying stock and doing nothing else. So thanks for watching. And in the next video coming up, we'll be talking about the covered put. 3. The Covered Put: All right, welcome back to the next video in this course. And so now we'll be talking about the cover put strategy. And the strategy is going to be very similar to the cover call you saw in the previous video. However, it's basically going to be the inverse, right, with the cover call. That was a bullish strategy, right? Ideally, you make the most money when the stock price goes up, the cover put is just the opposite. We want the stock price to go down. This is therefore a bearish strategy, but as you'll see here, once again, that is not actually have to happen in order to still walk away with some profit. So coming to the next slide here, before I get into the actual description of how a cover put works, I want to first talk about the concept of short selling, because from my experience, at least, short-selling does definitely not appear to be as well known or as well understood as simply bind stock and going long, right? I think most people have a basic understanding of simply buying stock and holding it until the price goes up. The like I said, short-selling definitely does not appear to be as well known or understood. So I do want to spend just a few minutes here talking about it to make sure you have a full understanding of how this works, because this is how you actually make money when stock prices go down. And this is the first step. The first thing you have to do to actually put on a cover put position. And so the way short-selling works, there's a couple steps here. The first step is you're going to basically borrow stock from your broker. And I will say before I continue here, a lot of this stuff is handled behind the scenes. So you don't actually have to go to your broker and say, hey, I want to borrow x minus shares of stock. But just to give you the full picture here, this is basically how it works behind the scenes. So first step, you literally borrow shares of stock from your broker. And then the next step is you sell those shares immediately in the market for the current market price. And once that is done at some point in the future, you're going to buy those shares back, ideally for a lower price, right? The whole point of this is to make money when the stock price goes down. So you buy those shares back in the future at the new market price. And once you've bought those shares back, you simply return them back to your broker. So to give you just a quick demonstration of how this works with a more concrete example, a Pope, the calculator here. So let's say I find a stock that's trading currently $450 a share. I'm currently bearish on I think the price is gonna go down at some point in the future. So I went to short sell the stock. So I'd borrow those shares from a broker and immediately sell them in the market at a price of 50 bucks per share, the current market price. And so this means I would literally be taking in money to put on this position, right? Instead of buying stock and paying money to get into position. Now actually doing the inverse, selling stock first and then taking in money. And so now let's say two weeks on the road at the price actually drops from 50 down to 40. And perhaps this was my target price. So at this point I would not want to buy back those shares at 40 bucks per share. So of the $50 per share that I took in initially, I'm not going to spend 40 bucks of that to buy those shares back. So I would subtract 40 here, which will leave me a profit of $10 per share, right? I sold them for 50, bought them back for forties. So the difference is ten. And if I did this whole process with, let's say 100 shares, then I would just multiply this number by 100, and that means my profit would be $100. At this point, my shares get transferred back to my broker. I'm officially out of the position with a nice profit here. But of course this is the ideal scenario. So if instead the price actually went up and I was completely dead wrong in my bearish assumption. So again, walking through the example here, if I sold them initially at 50 bucks per share and let say two weeks from now they actually went up to 60 bucks per share. At this point, I'm convinced I'm totally wrong. I want to just get out of my position. So I'm going to buy them back now for 60 bucks per share, which in this case leaves me a negative profit, right? Negative $10 per share. Because obviously I had to spend more than I took in initially to actually buy back the shares. And once again, if I did this whole process with a 100 shares, I multiply this by 100 and that leaves me with a loss of $1000. So I hope now that after seeing this, if you weren't familiar with short-selling before, that, it is a pretty simple concept. It's just the opposite of bind stock and going long. And so now that we have that covered, we can come back to the PowerPoint and go to the next slide here. And so now we can talk about how Cover puts actually work. And as I mentioned previously, the first step, the first thing you have to do to put on a covered put is short sell a certain quantity of some shares of stock that you are bearish on. And once again, you're going to do so in increments of 100 shares, right? Because again, call options and put options deal with increments of 100 shares to. But just like you saw in the last video, you can use margin and once again to significantly reduce the cost of doing this. And in my demonstration here coming up in a minute, I'll show you exactly how this works in regards to short selling stock. And so once you have this done, the second step is you're now going to sell a put option with a strike price that is lower and the price at which you shorted the shares for. And so just like with a covered call and the call options, this put will also be out of the money. And the further out of the money you go, the more risk you're going to take on, but also the more profit potential you will have as well. So there's always that give-and-take. And once again, you do have a limited profit potential with these cover put strategies. From my perspective, at least from my opinion, this little caveat here is more than compensated by the fact that you can make money with these cover puts in many different ways. The first of which is again, simply if the stock goes absolutely nowhere by the option expiration date. The second way, and this would be the ideal scenario, is that the stock does actually go lower by exploration, you will, of course, profit. And depending how low it goes, you can make the maximum amount of profit. But just like with the cover call, even if you are dead wrong and your directional assumption here, even if the stock price goes higher by expiration, you can still make a profit, again up to a point. But the fact that you can be totally wrong and still walk away with some money in your pocket, I think is very powerful. And I want to remind you here that think about these scenarios. If you had just shorted shares of stock and didn't nothing else, right? Just shorting shares of stock. The only way you can make money in that situation is that the price of the stock goes lower. If the price goes nowhere, you obviously didn't lose any money, but you didn't make any money either. And if the stock price goes higher, even by one penny, then you are automatically down money. And so this is why I believe that cover puts are a much better way of short selling stock. Because even though you have limited profit potential, you have a much, much higher chance of still making a profit even when you're wrong. And so now, if we come back to my trading platform, I can give you a demonstration of how this would work in the real markets. So once again, I have the same price action chart pull up for Twitter. And so even though in the last video I made a case for being bullish on the stock. I can definitely see that merit to being bearish on Twitter as well. And specifically right after this earnings announcement when Twitter had a huge drop in price, this little bounce right here could simply just be a dead cat bounce. And as time continues to move forward, we could see the stocks start to roll over and then continue lower. And I've seen this pattern play out many, many times before. That certainly does not mean it's going to happen this time, but definitely it's still a possibility. And so now that I've seen this little balanced start to stall out a bit. Now I want to place a bearish position on Twitter because I think it might come back down to the original low-price of right around $39 per share. And perhaps if it does return back down to 39, maybe it bounces again and goes back higher. But at least for right now I'm only concerned with the possibility of Twitter going back down to right around 39 bucks per share. And so now that I've identified my target price here, this would mean after I short sell shares of Twitter, I would want to sell a put option with strike of thirty-nine dollars. But before getting to that part, in order to short sell Twitter here, I'm just gonna come back up here once again. And now instead of by, I'm going to go to sell. And that brings up an order down here or ready to go. By default, it's set to 100 shares. I'm going to short. And once again, we can see the current trading price of Twitter is $43.53. And just for the sake of making the math a bit more easy going forward, let's just say I'm feeling a bit generous today. And I'm willing to sell these a 100 shares of stock for $43.50. So I'm Linda come down about $0.03. And so now that I have my price set, I can go over to confirm and send. And once again here you can see the cost of the trade is still the $4,350 that you saw in the previous video with a covered call, right? Because I'm still selling 100 shares of a stock for $43.50 per share. But once again, you can see what the buying power effect or the amount of capital that I have to actually put up to hold this position only still around $1300. So this is another example here of why using a margin trading account is very beneficial when you want to buy or short sell stock. And then lastly, I just hit send, send the order. Once it gets filled, I'm completely in my short position on Twitter stock. And like I said previously, the actual borrowing of the shares from a broker is all handled for me behind the scenes. And so even though the process of short selling is a bit more complicated than just mind stock and going long in practice. In reality, doing this in the real marketplace, it's actually just as simple as buying stock. Instead of hitting the buy button, you just hit the sell button. And so once I have all this done, the second step now is to sell that out of the money put option. And again, my target price for Twitter was right around 39 bucks per share. So this would mean I'm going to sell a put option with the strike price of $39. So coming over to the Trade tab now, here's the option chain. And just to keep this example is similar to the last one in the previous video. I'm gonna give myself two full months to be correct, or two full months for Twitter to draw from 4350 down to 39. So I'm going to use these january contracts once again. So unfold this tab here, scroll down a bit. And so now coming to the right-hand side here with all these put options, I'm going to sell this put option right here with a strike of $39. And based on the bid and the ask price and kinda going right in between, the fair price for this option would be right around $145 or so. So I can go ahead and set this order and change my limit price to 145. And then after double-checking everything, I can just hit Confirm and sand, get the order filled and then boom, I'm officially in my cupboard, put position on Twitter. And before I continue here, just in the refresher in regards to put options from the buyer's perspective here, a put option gives the buyer the right to sell 100 shares of Twitter. At the strike price, right? And it would only make sense to do so if Twitter stock was trading below 39 by exploration. Because let's say if Twitter was at $37 per share by January 15th, the buyer of the contract could go into the marketplace and buy Twitter at $37 per share and then uses put option to then sell those shares to the put options seller at a price of $39 per share and thus would make a profit of $2 per share. And so what does this mean in regards to the options seller, right? As I just said, the options seller would have to buy these 100 shares at the strike price. And so in regards to the cover put though, because the first step here was short selling 100 shares of Twitter. That means in order to close out of that stock position, we're going to have to buy back those shares, right? And this put option, specifically settings put option would require us to do that, to buy those shares back, but at a lower price than when we sold them, and that would obviously allow us to make a profit. Now let's walk through a couple of different scenarios here. Let's say come exploration in 61 days, Twitter stock was absolutely nowhere. We shorted them at 4350. And then come January 15th, there's still trading right around 4350. In this case, our stock position would not make any money, right? We would just be buying these shares back at the same price we sold them for. But because we sold us put option for a 145 bucks, that would actually be our total profit on this cover put strategy, right? Because if Twitter is still 4350, this put option would be absolutely useless. So it expires worthless, it disappears, and we get to keep the full 145. And the next scenario, let's say Twitter drops from 4350 down to about 40 bucks per share by exploration. In this case, both are stock position and are put option position would generate profit because if we sold those shares at 4350 and now we get to buy them back at only 40 bucks per share. That would be a profit of $3.50 per share times 100 shares is $350, right? And then once again, this put option would expire worthless, it disappears. We keep the full 145 and then we add this profit to our $350 profit on our stock position, which gives us a total profit of just under 500 bucks. Now would have Twitter totally blows through our put strike here, and it falls all the way down to maybe $36 per share. And just like you saw with the cover composition, this is once again where the limited profit potential comes into play, right? Because no matter how far Twitter falls in price, we're always going to have to buy them back now at $39 per share. That's the agreement we entered into when we sold this put option. Sylvia's sold the shares initially for 4350 and we get to buy them back at 39. That's a profit of $4.50 per share or 450 bucks in total. And so once we buy those shares back from the put option buyer, right, we then return those shares to a broker. Again, that's all handled automatically behind the scenes and we still get to keep the full $145 that we sold a put option four, we made 450 bucks on the stock portion of this position. And on top of that, we made an additional a 145. That means the total profit for this cover put is just under 600.595 to be exact. And so now what happens, however, if we are wrong in our directional assumption, and Twitter actually continues to go higher and higher over the course of the next 60 days. Well, just like with a covered call position where we could offset losses from that call option we sold. We can do the exact same thing here. If we sold this put option for a 145 bucks, we can use this money to offset any losses. So for example here, if come expiration, if Twitter actually moves higher from forty three hundred fifty, two forty four hundred fifty, that means we have to buy them back at a price higher than when we sold them for initially, right? And specifically we would lose a 100 bucks on our sock position in this case. But if we also gained a $145 from this put option, that means in the end, we still get to walk away with a $45 profit and will still be able to walk away with a profit all the way until Twitter trades above $44.95, right? 4495 is basically the breakeven point for this cover put strategy. Because if Twitter where to trade at that price come exploration, and we bought those shares back at 4495, we would lose exactly a 145 bucks on our stock position. We would make exactly a 145 on this put option. So in the end, we totally just break even. And lastly here just as another reminder, with these covered puts two. You also don't have to wait all the way until expiration to close out of this position for either a profit or a loss. But just like with the cover call, you will not be able to do so. You can close out of this position early for the maximum amount of profit possible. And that's because up until expiration, you're always going to have to buy this put option back for more than $0, right? The only way we get to keep the full credit we sold this option four is by either the option expiring totally worthless on expiration day, by us getting assigned on this put option on expiration day and having to purchase a 100 shares of Twitter at the strike price of $39. So again, if you do want to get out of a cover puts strategy early, you simply buy the shares back that you shorted and then you buy back the put option that you sold as well. Once you've done both of those things, you are officially out of your cover put position. And so I believe that covers it for this video, I hope you are able to see the true power of the cover put strategy and that you would also agree by now that it is definitely a better alternative to just simply short selling stock and doing nothing else. So with that being said, I'll see you in the final video coming up next just to wrap some things up and then send you on your way. So seeing the next one. 4. Wrapping Up: Alright, congrats on finishing this course and hope that by now you also see the true power of both the cover calm and the cover put, as opposed to just buying stock or short selling stock. And to help you get started utilizing these kinds of strategies in the real marketplace, you can take a look at the course project down below. And so with that being said, thank you so much for watching this course. I do appreciate any feedback that you may have. And moreover, if you've got questions are unique clarification something please do post a comment in the discussion section of this course, and I'll get back to you as soon as I can. And also I encourage you to check out the other courses I have unskilled share. I've got a lot of content or he published On other stock market investing concepts, as well as a lot of options trading courses. And I also have a few classes on computer science related topics as well. And lastly, please do also follow me on skill share so that you'll get notified every time I come out to new course. So thank you for watching and happy trading.