The webinar was recorded December 17, 2020.
You can
find the slides here.
Chris Preston [00:00:06] Hello and welcome to today’s Cabot Wealth webinar, Two Basic Options Trades to Make Money on Growth Stocks. I’m your host, Chris Preston, Chief Analyst of the Cabot Wealth Daily advisory and Managing Editor here at Cabot Wealth Network. With me today is Jacob Mintz, Chief Analyst of our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Today, Jacob is here to talk about options trading, how it works, how to profit in a sideways market like the current one, and how to use options to squeeze more profits out of your best stocks. As the title suggests he’ll be giving you two of his best easy to understand options trades later today.
Chris Preston [00:00:42] This is an interactive webinar, which means we’ll be fielding your questions after Jacob’s presentation concludes. So if you have a question, feel free to ask it at any time. And the question box on your control panel and we will try to get to as many of them as time allows once Jacob wraps things up. Just keep in mind that we cannot offer advice in regards to your own personal investing situation or portfolio.
Chris Preston [00:01:03] First, let me introduce Jacob. Jacob Mintz has been a professional options trader for the past two decades, using his proprietary options scans Jacob creates and manages positions in equities based on unusual options, activity and risk/reward. Jacob developed the proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years after a successful career on the trading floor. Jacob was tested - tasked - with setting up a trading desk at a top tier options trading company, trading against the most sophisticated hedge funds and institutions in the world. Today, Jacob trades for himself, coaches and teaches about options trading and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Bottom line, Jacob knows what he’s talking about when it comes to options trading, so I’ll let him do just that and tell you about his successful approach. Jacob, take it away.
Jacob Mintz [00:01:59] Thank you very much, Chris. As he said, my name is Jacob Mintz. I’m the Chief Analyst of Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster. And this is Two Basic Options Trades to Make Money on Growth Stocks. Now, before I really dive into the presentation, I do want to say that, you know, if you have any questions, please submit them. I really enjoy the options education component of my role at Cabot Options Trader. I’ve taken a lot of beginner options traders to intermediate level traders and intermediate level traders to professionals. So please send your questions. I really do enjoy the options education component of my role.
Jacob Mintz [00:02:35] Now, also, before I get started, I do want to say if you are new to options. They are - if you really spend the time and learn about what to call is, what a put is, what is a covered call, the basic option strategies, you can really learn to be a relatively sophisticated options trader and use options to create extra yield in your portfolio to get leverage. So it’s really something that I would encourage that every investor should know about.
Jacob Mintz [00:03:04] So let’s dove into my presentation. So as Chris said, I was a market maker on the floor of the Chicago Board of Options Exchange for 10 years. Now, how did I get there? When I was a graduate from Miami of Ohio in 1999, I was interviewing at all the hot jobs at that time, Accenture and PricewaterhouseCoopers. I was in Chicago interviewing with those firms and staying at my uncle’s house. He could tell that I really wasn’t into those type of jobs. And he said, I know a guy down the street who I think is making a lot of money at the Chicago Board of Options Exchange, which is referred to as the CBOE. He said, Do you want to meet those guys? I said, yes, and one thing led to another. And I studied with two trading floor legends for a full year, just learning what to a call is, what a put is, what is a covered call. Kind of like I was talking about how how you would learn how to become a sophisticated options trader. So what does it mean to be a market maker? So after I studied with those guys for a year, I was a market maker in a trading crowd. It was my job to make markets and provide liquidity if you want to buy or sell an option. So let’s say you wanted to buy a call in General Motors, let’s say. You would call your broker. And at Morgan Stanley, let’s say you would say, I want to buy this General Motors call. Where can I do it? So the broker would come down to my trading crowd and he would say, where can I buy the General Motors January 40 call? It was my job as that market maker to say I will sell to you for a dollar. So the broker would call you back and say you could buy it for a dollar, you say, buy it for a dollar. And from there I would sell you that option. I’m essentially making a market and providing option liquidity. So I would make those markets and trade against you, as well as some of the most sophisticated hedge funds and institutions of the world. If you want to buy five options, that wasn’t necessarily a problem. I could just sell you five. If it was a hedge fund or institution want to by a thousand, five thousand, ten thousand calls or puts, that’s where things got a little bit dicier. But that was my job, was to provide liquidity and be a market maker.
Jacob Mintz [00:05:06] So enough about me. Let’s talk about how you might implement options in your personal portfolios. So despite what this cartoon says, and if you listen to the news and read the newspapers, you think the world is ending. The end is near as the cartoon, but the bull is firmly in control as the S&P 500 and Nasdaq are at all time highs. Look, it’s rough out there in terms of the in the real economy, there’s a coronavirus, there’s political nonsense, there’s trade wars. There’s a lot of headlines that could scare you out of the market. But really big picture, it’s a bull market. And what we do in a bull market to profit is we buy call options.
Jacob Mintz [00:05:51] So what does what does it mean when you buy a call option, so first here I’m going to give you a definition and we’re not to get too terribly worked up about that definition and then we’ll break down what that definition actually means. So if you buy a call option that gives the holder the right to buy 100 shares of the stock at the strike price any time prior to the options expiration date. Again, don’t get too worked up about that. That’s just where we’re going to start. Here’s where it gets more interesting. Each one equity option contract represents one hundred shares of the underlying stock. So if you buy one call, that’s the right to buy one hundred shares of the underlying stock. It’s a multiplier of one hundred. So if you buy two call options, that gives you the right to buy two hundred shares. It’s a multiplier of one hundred. If you buy five call options that - those five options represent five hundred shares of the underlying stock, it’s a multiplier of a hundred. Here’s the next important component. The potential loss for the holder of an option is limited to the initial premium paid for the contract. So a lot of people try and say that options are a way to - you could blow out, you can lose all your money trading options. That’s just not really the case if you know what you’re doing, because the risk is truly defined to the initial premium paid for the contract. So if you buy a call option and you spend five hundred dollars, the most you could possibly lose on that option contract is five hundred dollars. The most you could possibly lose when you buy an option is the initial premium paid. You know what you’re risking when you get involved with buying a call option. So let’s say you ready to a buy a call option, so you say you sit down, you log in to your brokerage platform and you say, well, which call options should I buy, there’s all types of strikes and expiration dates. And, you know, it could be a little bit overwhelming. But I want to give you my rules for which options you should be looking to buy if you want to have a bullish exposure to a stock.
Jacob Mintz [00:07:41] So here’s how you don’t do it. This guy says tips to increase your chance of winning the lottery, buy as many tickets as you can afford. That’s pure nonsense. We account options trader. And I think all options trader should stick to this rule. We want to play the right odds. We want to place bets or trades that have a high likelihood of success. So, for example, if you think that if you want to get long Apple, let’s say we don’t buy calls that’re saying apple’s going to go from one twenty five to two hundred. This is an unlikely scenario. Instead, we’re trying to buy calls that are near the current stock price. We’re playing the right odds. So if Apple trading at one twenty five, I would recommend buying the one twenty five strike calls or the one thirty strike calls, because it’s likely or it’s more likely that Apple will go from one twenty five to one thirty, than as I was saying, don’t buy the two hundred calls because it’s very unlikely that Apple will go from one twenty five to two hundred. We want to play the right odds.
Jacob Mintz [00:08:41] Time is also critical when you’re buying an option, there are all types of expiration cycles when you’re looking at options. So there’s Apple. Just stick with the Apple example, the Apple right now, there are options that are expiring tomorrow. There are options that are expiring next week. They’re obviously expiring the following, but there’s also options that have longer duration that are that won’t expire for many months. So. You can - it’s hard to predict what a stock will do in the very short term, so stocks kind of chop around. They go up. They go down. They go up. They go down. Sometimes they go down for a long, you know, for weeks. So I my point is, I don’t want you to buy options that are expiring the next week or two because it’s hard to tie up a big stock move, instead, which expiration signal should I buy? I recommend buying calls with three to nine months until their expiration. That gives a trade a lot of time to work. Like I said, if stocks are chopping around or if they go down. If Apple goes down. If Apple, Microsoft, Google, Amazon, the FANGs of sorts as their known. Let’s say they fall out of favor. Well, those stocks go down for a day, a week, a month. But big picture, though, if you if you’re bullish on Apple, if you buy an option with three to nine months until its expiration, that gives the trade more time to work. So I recommend buying calls with three to nine months until their expiration.
Jacob Mintz [00:09:58] And I am going to go into an example of a trade that I might look at. So let’s take a look at Pinterest. This has been a big winner this year and most recently it gapped higher and earnings gap from about forty five to about 60 has kind of risen to 70 level, has been kind of chopping around since then. So if I was bullish on Pinterest and I wanted to get bullish exposure, how might I do that? Now, this is a trade that all the trades that I’m going to list, I had to create this presentation a couple of days ago in the market’s been moving. But big picture, I just want you to get an idea of how you might play a trade like this. So Pinterest trading around 70, 71 today. So what might we look to do? We might look to buy a Pinterest (PINS) May 70 calls for fourteen dollars. So the symbol is PINS, that’s pretty easy, the date of the calls expiration is May 21, 2021. So again, I’m giving myself time for this trade to work. I’m not saying Pinterest has to rally today, tomorrow, even in the next month, but by May that’s when I need Pinterest to rally by. The strick price is 70. That means that I am buying the right to buy Pinterest at seventy dollars at some point in the future on that May 21st date. So if Pinterest were trading at ninety dollars, let’s say, and we bought the 70 strike call. That is the right to buy Pinterest at seventy dollars. So Pinterest is trading at ninety dollars and if you want to go out and buy it in the open marketplace on this may date you’d have to pay 90. But because we bought the May 70 strike call, we have the right to buy the stock at 70. Now, the price for this option is fourteen dollars. This is a very important component, similar to what I was talking about earlier, how it’s a multiplier of a hundred when you buy one call - if you - the price is similary multiplier of one hundred. So if you buy this option for fourteen dollars actually fourteen hundred dollars because it’s a multiplier of one hundred. What’s the risk in buying this call? The potential loss for the holder of an option is limited to the initial premium paid for the contract. That’s what we talked about before. The most we could possibly lose on this trade is fourteen hundred dollars per call purchased. So Pinterest can go to zero. The most you can possibly lose is that fourteen hundred dollars. I am going to show you what that looks like. Here is a profit and loss graph of our trade of the May 70 calls for 14 dollars. If Pinterest were traded 70 or below on that May date, the date of the call’s expiration, you will lose fourteen hundred dollars. However, that’s the most you can possibly lose. On the upside, you have unlimited upside exposure should Pinterest continue to rally. So at 110, this trade will be at a profit of about twenty six hundred dollars. That graph will continue going as far right and high as the stock goes. So the power of options. Instead of paying seven thousand dollars to buy one hundred shares of Pinterest today, you can pay fourteen hundred dollars for the opportunity to buy 100 shares at seventy dollars. So you can see it’s really a leverage game.
Jacob Mintz [00:12:54] Options are a way to get bullish and bearish exposure to stocks at a deep discount, in this case paying fourteen hundred dollars instead of seven thousand dollars to buy one hundred shares. So here’s some other ideas in stocks I like. Some of these stocks have really moved since I created this presentation just a couple of days ago. But I just want to use these as examples.
Jacob Mintz [00:13:14] So symbol - CrowdStrike, symbol CRWD. The stock at the time was trading at qone seventy five. So, again, I was looking to buy calls with three to six, three to nine months. So the expiration. So maybe buying the June one seventy five calls for thirty dollars. So you can see I’m buying the June calls, so I’m giving myself about six months of time and the stock is trading at one seventy five at that point. So I was looking to buy the one seventy five call. Zillow when I created this presentation was trading, stock was at one twenty seven so I said buy the June one thirty call. So that’s just slightly above the current stock price for nineteen dollars. Chewey at the time was trading at eighty five, now it’s trading at one hundred. That’s a big mover this week. So but anyway I was saying by the April ninety calls, again just slightly above the current stock price. I’m not saying by the Chewy one fifty calls, I’m saying by the ninety calls. Apple. The stock was trading at one twenty two, buy the April one twenty five calls for around nine fifty. Uber. Stock at fifty two and a half by the June fifty five call for seven dollars. And last, SNAP stock trading at fifty four, again just buying calls with six to seven months until their expiration with the July fifty five call for nine dollars. So that’s how we call options. We try to buy calls that are near the current stock price and give the trade some time. That’s the key takeaway from this, that part of the presentation.
Jacob Mintz [00:14:35] So how do we profit in a sideways market? As I said, we’re in a bull market right now, but at some point we will get in a sideways market where the market just kind of chops around aimlessly or even a bear market. So it’s not always as we’re not always in as great a market as we are right now. But at some point we’ll get in a sideways market, which it’s just chopping around. So how do we profit in that type of market environment? So there’s three we’re going to talk about covered call trades and there’s three ways to make money via covered calls. Now, covered calls are the most basic options strategy out there, even more basic than buying calls. So there’s three ways to make money with covered calls, and I’ll go into a lot of detail about this. If the stock goes higher and when you sell a covered call you collect an option premium as well as you can make money if you own the stock and sell a call via the dividend. And again, don’t get too worked up about what that means. I show you various scenarios of how we can do that. And we do this at Cabot Profit Booster, which is a combination of fellow Cabot analyst Mike Cintolo’s stock picks from Cabot Top Ten Trader, as well as my cover call ideas. Now for those of you who don’t know Mike, Mike is somebody who eats, sleeps and dreams. Dreams about stock charts. His wife might be thinking about love, but Mike is always thinking about stock charts. He’s really good at finding stocks on the verge of breaking out, as well as all the technical analysis that goes with it. So what we do is we take Mike’s stock picks and I choose one of his stock picks and sell a covered call option on that. So that’s what we created at Cabot Profit Booster, which the results have been pretty spectacular. Mike releases one to his ten stock ideas on every Monday night, and I recommend on Tuesday one covered call trade so you get four covered call ideas a month at Cabot Profit Booster and the results have been spectacular. Just making five percent, seven percent, 10 percent, 15 percent, 20 percent, week after week, month after month. And that’s what we do, at Cabot Profit Booster. So let’s see.
Jacob Mintz [00:16:31] Let’s talk about how we do this with covered calls, which are also known as buy-writes. When you have a covered call you buy or own a stock. So Mike would recommend a stock and we buy the stock and we sell a call option on that stock. For every 100 shares of stock you own, you can sell one call. So if Mike recommends buying Apple, let’s say if we buy one hundred shares, you can sell one call. Again, it’s a multiplier of a hundred. If you buy our own five hundred shares, you can sell five calls. And when you sell that call, you are collecting a premium. So if you sell a call for five dollars, like in the Pinterest example, we bought a call theoretically for fourteen dollars and we pay fourteen hundred dollars. When you sell a call you collect that premium - that fourteen hundred dollars in the Pinterest example comes into your account. Now you collect a premium but you give up major upside. I’ll give an example of that scenario. So why sell covered calls? You create yield, you essentially get paid to hang on to stocks you already own. Let’s say you you’ve owned Exxon Mobil for a - for a long time. You sell a call option on that stock. You are collecting money. It’s like an extra dividend by selling that call also is a very conservative strategy. Selling covered calls doesn’t increase your risk. In fact, it reduces your cost basis. And that’s really important component of this. Covered calls for a very, very conservative strategy. And it reduces your exposure and cost basis to a trade. Also it is a great way to learn about options. If you never if you’ve never traded an option before, covered calls are the way to start. It is a risk reducing strategy. And that’s what we do at Cabot Profit Booster. Start taking a lot of people who are new options and have that they started at Cabot profit booster. Then they move on to Cabot Options Trader and more advanced strategies.
Jacob Mintz [00:18:12] So why would you not sell covered calls? When you sell a covered call - when you sell that call, it limits your upside potential. So if you own a stock and you think it’s going to go from 50 to 100, let’s say, you don’t want to sell a call option that stock, because it will potentially limit your upside exposure to that stock. And I’ll show you exactly what I mean in this example. So let’s take a look at one of the stocks that Mike recommended this week in Top Ten Trader. It was Baker Hughes symbol, BKR. So what we do when you get a Profit Booster idea every week is you get a little bit of Mike’s stock story. Actually, you get all of Mike’s stock story that he’s written about the previous night, as well as his technical analysis on the stock. So I put all of that in my email and then we execute a trade on it. So he said he recommended potentially looking at Baker Hughes. So what we do if we were interested in putting on a similar trade is - a covered call trade is - we buy BKR stock for twenty two and a half and then we would sell to open the January twenty three call for a dollar thirty. So we’re buying stock just like any stock purchase. At the same time you sell to open the January twenty three call for a dollar thirty. So let’s take a look at the break even scenario in this trade. Price paid was twenty two and a half plus you collected that initial call premium, a dollar 30. So that lowers your break even on this trade, to twenty one twenty. Tewnty two and a half, plus the premium that you collected when you sold that call, the one 30 that lowers your break even to twenty one twenty. Remember, this is a risk reducing strategy. So BKR can fall as low as twenty one twenty and you won’t lose money, you bought stock at twenty two and a half. And now we’ve just lowered a break even to twenty one twenty.
Jacob Mintz [00:19:52] So let’s look at the various scenarios of this trade. The good scenario is the stock doesn’t move for the next month. So if the stock is just kind of chopping around plus or minus a dime, quarter, fifty cents, whatever, it doesn’t matter. The stock’s not really moving. That option that you sold will expire worthless. So you get to keep that one hundred and thirty dollar option premium because remember, you sold a call for a dollar 30. It’s a multiplier. One hundred. So you’re collecting one hundred and thirty dollars. So you collected one hundred thirty dollar option premium and you have a yield of six point one three percent in one month’s time. So remember, the stock is chopped around and gone nowhere. So if you just own the stock, you wouldn’t have made any money on that option on the stock trade. But in this case, because you sold a call option, you have a yield of six point one three percent. The best case scenario is some stock appreciation. If Baker Hughes rises 50 cents to just under the twenty three strike price that you sold, you get to keep your stock position. So you and you have the gains in the stocks, the stock, you make 50 dollars on the stock rising 50 cents plus that option premium. That one hundred thirty dollars. Now, your profit is eight point four nine percent in one month’s time. Again, the stock has only really risen 50 cents. But but you’ve created a yield of eight point four nine percent in one month’s time. You can do that month after month after month, eight point four nine percent over and over and over again. That turns into a really big year real fast. The worst case scenario is a dramatic drop in the stock. Worst case scenario for any covered call strategy is for the stock to drop dramatically, though in this situation, the traders still collects his full option premium. And remember, when you collect that option premium, you’ve lowered your break even on the trade. So let’s just say you bought BKR stock and it went down just without without being involved with the option trade. You would lose money on the trade. If you do the covered call and the stock dropped dramatically, you will lose money on trade, but you will have lost less money because you collected that insurance premium of sorts. So the OK scenario in this trade, if BKR stock explodes higher, let’s say it goes from twenty two and a half to thirty or thirty five. We will not participate in that dramatic stock rise because the person who bought the call from you will exercise his right to buy the stock from you at twenty three. So you will make money til the stock goes to twenty three at that point, the most you’ll possibly make on this trade is that fifty dollars - fifty dollars from the stock gain plus one hundred thirty dollars from the option premium or that eight point four nine percent return in one month’s time. So if a stock has taken over and you have a recall on it, you will only make five or 10 percent. You won’t make the full twenty five or thirty five percent. But that’s part of the game. That’s why we are essentially selling a insurance policy that the stock is not going to go dramatically higher.
Jacob Mintz [00:22:34] So this is what it looks like when you get a Cabot Profit Booster idea each week. There is a initial breakdown that I talk about our positions or the market, what I’m seeing in the market. Then I go into the stock analysis, which is Mike’s stock analysis - his technical analysis, as well his stop, which we use. We use his stops to take us out of positions, as well as the chart that he’s looking at. And then we go into the covered call trade, where I give exact details about how we get into the trade, what’s the most money we can make on the trade, what our break even is, what’s the best case scenario, what prices you could buy and sell it at, as well as our current open positions, basically at Cabot Profit Booster, Mike gives the stock I give the option trade and I hold your hand all the way through, if we need to both getting into the trade as well as well as getting out of the trade. It’s really a great way to get started on options and cover calls. So that’s all I have for my presentation. I’ll turn it back over to Chris and he will probably queue up a couple of questions for me.
Chris Preston [00:23:37] Yeah, thanks, Jack. Yeah, I’m gonna give Jacob a minute or two to catch his breath before he starts answering some of your questions. I see we’ve got quite a few rolling in. In the meantime, just wanted to tell you about how you can sign up for Cabot Profit Booster if you’re interested in what you’ve heard from Jacob so far today. Today, we have a special one dollar introductory offer reserved exclusively for listeners of today’s webinar. What you get in return for paying just one dollar for the first month is weekly issues every Tuesday morning that feature a covered call idea based on Mike Cintolo’s Cabot Top Ten Trader picks released the night before. As Jacob mentioned, investor alerts with special bulletins about market changes and trade alerts, 24/7 online access to our exclusive Cabot Profit Booster Library and analysts archive so you can look back at past issues, plus direct private access to Jacob for answers to any of your investing questions or options trading questions and to sign up now, again for just one dollar for the first thirty days, go to the website on your screen. That’s CabotWealth.com/webinarspecial.
Chris Preston [00:24:44] Alright now let’s get to your questions. Let’s see. George has been waiting patiently. He had a question early on, “Jacob, why do you avoid leaps for high priced stocks? Tesla, Qualcomm, Apple, Microsoft, leap’s have been very successful.”
Jacob Mintz [00:25:07] I don’t necessarily avoid them. I will say that. We’ve - at Cabot Options Trader we don’t trade them very often. I - longest I tend to go a long time as about, like I said, about nine to 12 months. It’s really just a function of those options are dramatically at times more expensive. So if I were to look at it, if I was looking at that Pinterest option right that expires in a couple months, that option was fourteen dollars. If I were to look at a Pinterest that were to expire in two years, let’s say. That option could be, I don’t know, seventy dollars. So instead of paying fourteen dollars, or fourteen hundred dollars, if I were to buy a leap option on Pinterest that would cost about 70 or seven thousand dollars. I have no problem buying leaps. In fact we’ve been writing about that Cabot Options Trader recently. Leaps are a great way, they’re longer dated options, they’re options that expire in a year or two. They’re a great way to play turnaround type plays in stocks as well as sectors. So if you think the oil stocks are going to rally in another two years, you can buy a long term option in Halliburton or Exxon Mobil. It’s a great way to get exposure, cheap exposure to a turnaround story. So no problem with that strategy.
Chris Preston [00:26:20] OK, speaking of strategies, Amir, hopefully I’m pronouncing that right had a question, “Should we should we buy puts sometimes with covered calls to cover downside risk?”
Jacob Mintz [00:26:32] Should we buy? I’m sorry can you say that again. Should we buy what?
Chris Preston [00:26:34] Buy puts sometimes with with covered calls to cover downside risk.
Jacob Mintz [00:26:38] That’s a good question. I don’t. Because there’s no problem with that strategy. He’s essentially saying we hedge our downside exposure with buying a put option, which is a bearish position. I don’t because these are essentially plays where I’m trying to collect a yield, where I’m trying to collect an insurance premium. And if you buy a put, you’re now paying money to have bearish exposure. So you’re essentially selling insurance on one side and buying insurance on another, you’re probably net net a kind of a wash in terms of collecting that insurance premium. So, you know, in a bear market, you could do that if you’re if you’re worried about that type of situation. But in general, I have Mike’s stops to take me out of the trades. So I don’t necessarily feel like I have to buy put options. I use Mike’s stops. He gets us out if we get in trouble. But truth be told, it’s been since the covid March sell off since we’ve had any stops set. So we’ve been very lucky. We’ve been dodging raindrops of sorts through this market and we’ve just been collecting yield month, week after week, month after month. It’s a good question.
Chris Preston [00:27:45] OK, question from Tia, Tia asks, “How do you decide on the strike price on a covered call?”
Jacob Mintz [00:27:52] That’s another good question. So it really depends on how bullish you are on the stock. So if you think both on the stock as well as the market, so in general, if it’s a bull market, you might and you’re really bullish on a stock, you might move that strike price further out of the money. So if let’s just go back to Pinterest and Pinterest is trading at seventy dollars. You think the stocks gonna really rally a lot higher, you might choose a strike like the eighty or eighty five strike because they’ll give you more room for the stock to run. They’ll give you another ten dollars and say to the 80 strike that you can make money on that that stock run. Now, the downside strategy is you get less of an option premium because it’s less likely that the stock will run that. So in a bear market or a sideways market or a stock that I think could be in trouble, we want to sell an option that’s really close to at the money and you’ll get a bigger premium, option premium, that will buffer the stock purchase if the market or that stock were to fall.
Chris Preston [00:28:51] OK, lots of questions rolling in. Let’s see. David asks, “Do you buy shorter time frames in sideways markets?”
Jacob Mintz [00:29:03] No, I actually go the opposite way. If you’re buying calls and you’re in a sideways market, you want to buy yourself time because that gives... In a sideways market, the option will lose value as time passes. So but in a sideways market, you want to buy a longer term option to give the market and the stock more time to get going of sorts. Now, in a sideways market, in terms of selling covered calls, that’s where you sell calls that are at the money because that gives you the best bang for the buck. So in a sideways market, sell calls that are the money. In a bullish market, you want to sell calls and the covered call strategy out of the money and in a sideways market if you’re looking to buy calls buy calls with more time.
Chris Preston [00:29:47] That dovetails well into question by another David who had asked, “Are you recommending buying slightly out of the money rather than slightly in the money?”
Jacob Mintz [00:29:56] Yeah, that’s a good question. That’s my strategy. I buy calls that are at the money or slightly out of the money, as those options are slightly less expensive than the in the money options. In the money options will move more dramatically with the stock. So if a stock is rising, you’re really bullish on a stock, you can buy a call that’s in the money. It’s going to cost you a little bit more. But it will move much faster. If you think the market could be starting to tap out, but you’re not really sure. You don’t have high conviction then buy a call that is at the money or slightly out of the money as those options will cost you less and if the trade goes wrong, you’ll have less exposure to that trade. It’s also a way to if you want as much exposure as possible, you can buy five options, let’s say, that are slightly out of the money. It costs less versus putting the same amount of money into an in the money option where you can only buy two of those calls because they’re more expensive. That’s a good question.
Chris Preston [00:30:54] Duke had a question earlier, and has been waiting patiently, a little bit of a different question, “When options contracts come on the market, who are the original sellers? Is it the institutions or individuals?”
Jacob Mintz [00:31:06] So good question. The original the people who made the markets kind of like myself back in the day. It’s my job as soon as they’re listed to make those markets. So as soon as the options listed on that first day, nine thirty Eastern, it’s my job to make liquidity in the market or in that or at least it was back when I was a market maker. Nowadays it’s a it’s a computer. It’s an algorithm that’s making those markets, but it’s an electronic trading firm that’s making those markets, that is allowing you to buy and sell options. If, you know, one of the reasons I left the trading floor - the only reason I left the trading floor - was the computers were getting just too good at pricing options. And there they were able to move their markets faster than I could if if it was 2005 all over again. And I was still we were still making markets all by humans. I would still be down the trading floor. But technology changed, the world changed, and so did options with it.
Chris Preston [00:32:03] Here’s a question from Julio, who sounds like he’s pretty new to options, just sort of a clarification, a couple of quick clarification questions, “Am I right? You can only trade options if you have stocks that have the stocks in your account? And should it be a minimum of one hundred shares and should you have ready cash in your account?”
Jacob Mintz [00:32:25] All right, so let’s let’s just take each one of those one at the time. You do not need to own a stock to trade an option on it. So if you want to buy an option in Apple, you do not have to. If you want to buy a call, let’s say you do not have to own the stock, you could just buy one call option. Now, if you want to sell a covered call, you have to buy that hundred shares and then sell the call. The only scenario when trading options where you have to own the stock is in the covered call scenario. You want to just buy calls and buy puts you do not need to own the stock. What was the second question, Chris?
Chris Preston [00:33:04] It was, “Should it be a minimum of one hundred shares?”
Jacob Mintz [00:33:09] OK, so yeah, you don’t need that hundred shares unless you’re trading covered calls, So let’s just and that their - only time you need to own one hundred shares of stock is if you’re executing a covered call. And the last question was should you have a lot of money on the side, I think, just in case you want to make further trades here, an options trader I get. Yeah, it’s always I mean, I always have cash on the sidelines ready to act, you know, just in case we run into another scenario, hopefully we don’t. Another scenario where the market drops 20, 30 percent. I always have money ready to go just in case. You know, we don’t know when the market will unwind. We’re in a great bull market right now, but I still have plenty of cash on the sidelines ready to act on any opportunity, any time. Good questions.
Chris Preston [00:33:54] Question from Laura, it’s sort of just about covered called basics, “So you do covered calls when the stock - on a stock when you think is not going to move in either direction?” No - I guess she means very far in either direction.
Jacob Mintz [00:34:12] Yeah, that very far, that component is right. So that’s type of stocks. Let’s see. So we are at one of my portfolios. We have a position in rocket mortgage, symbol RKT. The stock has been chopping around between 20 and twenty two and a half for like a month or two, really. So every single month we just keep selling. Actually, every couple of weeks we sell calls and we’re just collecting those option premiums. That’s the best type of scenario for a covered call. Really, the way you make money on covered calls, the best case scenario is a stock doesn’t move or the best case example in that I showed earlier is when the stock rises a little bit. So if the stock goes from - stock X, Y, Z goes from 10 to 11 or 10 to 12, that type of move or just sticks around the ten level, that’s the best type of scenario. But you can execute these trades on any stock. If the best scenario is a stock trends higher and you make money on the stock appreciation as well as the option that you collect. Good question.
Chris Preston [00:35:16] OK, question from Scott, actually, Jacob do you mind advancing just to the next slide? Question from Scott, “If you sell a covered call, is there a way to close your position prior to the expiration date?”
Jacob Mintz [00:35:30] Sure, that’s another good question. So if you sell a covered call, or any option, you can close that trade the up until the day of expiration. So actually, tomorrow is the expiration of December options. So if you are long or short a December option, you can close it at any point prior to four o’clock Eastern on expiration Friday. So let’s say we sell an option in January and we say we do a cover call in January and we just want to get out of the trade. We can close that January option today, next Monday, next Tuesday, next Wednesday, any time prior to that options expiration date. You’re not locked into any commitment until four o’clock Eastern on expiration.
Chris Preston [00:36:18] OK, question from Tracy, “Jacob, you often write ‘Sell blank call for blank amount or less’, why ‘less’ wouldn’t ‘or more’ be an increase profit on a covered call?”
Jacob Mintz [00:36:32] So that’s a good question. So I wrote for a net price of blank or less. So when I say that, I say buy stock. So today we bought PLTR, Palantir. I’m not sure if I’m pronouncing that right. We bought stock. So that’s part of the math equation. Plus we collected the premium on that call. So and when I say ‘or a net price of blank or less’, I’m saying the stock price minus the call collected. So if you bought stock at twenty five and we sold the call for one and a half, so I’m saying buy it for twenty three and a half or less, which the combination of the stock, what you paid as well as the call you collect. Yes. You always want to sell the call for more.
Chris Preston [00:37:16] And a question from David, “Do you use LEAPs for undervalued stocks?”
Jacob Mintz [00:37:21] Yeah, that’s a great strategy. Our most recently traded was a couple of years ago with was Union Pacific stock was in the dumps and we bought an option after - what I do with Cabot Options Trader is I follow unusual option activity. So when when hedge funds and institutions are putting five million, 10 million, 15, 20 million dollars into trades, I follow trades if I like the risk and reward. So in that case, a big hedge fund or institution that bought like twenty or thirty thousand Union Pacific calls risking, I don’t know, fifty, seventy five million dollars. And we - and the stock was in the dumps and they bought a LEAP option and we bought a LEAP option with them. So yeah, I have no problem with LEAPs, especially in this environment if you want to buy a LEAP on a airline stock or a hotel or those type of stocks that are beat up and they’re going to, one would assume, make a recovery once the whole coronavirus situation kind of simmers down. So I have no problem buying LEAPs on undervalued stocks. That’s a great way to get exposure.
Chris Preston [00:38:25] OK, question. Someone else has been waiting for a while. Yarek, hope I’m pronouncing that right. “Jacob, I subscribe to your Cabot Profit Booster. My question is, would you recommend rolling up your short option in a covered call strategy if the stock takes off instead of doing nothing and waiting till the expiry?”
Jacob Mintz [00:38:47] Yeah, so that’s a good question. So we’ve been so we’ve been very fortunate at Cabot Profit Booster that I’ve been - Mike’s been picking great stocks, Mike Cintolo’s picking great stocks, and I’ve been picking some of the best from his list of top 10. So we’ve been so we bought Mike recommended buying Pinterest when it was trading. We’re going to back to Pinterest. It was trading at fifty seven and a half. We bought the stock then and now it’s taken off and streeting at seventy dollars now. So we will have made a yield of 14 percent or whatever the number is tomorrow it actually expires. So the traders asking should we had sold the December 60 calls. He’s saying should we instead of just letting the trade expire, should we buy back that December sixty call and sell another call, maybe at the seventy strike. So we could do that. And it’s a totally fine strategy, but we have not been doing that at Cabot Profit Booster, we’ve been happy to make our you know, in this trade we’ll make six hundred fifty dollars per covered call or yield of like I said, about fourteen or fifteen percent, whatever the number is. I’m happy to make that in a month’s time. That’s our strategy. We’re just trying to hit and run. We’re trying to make five percent, 10 percent, 15 percent and just hit it and run. Get Mike’s freshest ideas and get out of those trades that didn’t work and move to his next fresh idea. And we’ve gone back to several trades. I think we’ve been in I can’t remember off the top of my head some of the trades, but we’ve we’ve revisited a couple of stocks a couple of times as he continues to write positively about them.
Chris Preston [00:40:17] I think we’ll do one or two more question from Mark, Mark, “Love everything Cabot offers. Thanks. I’ve been selling calls in this bull market and the underlying stock is typically being taken. In a bull market, can we sell the puts on a great stock instead of selling the call?”
Jacob Mintz [00:40:35] Yeah, absolutely. Selling books is a - that is a bullish strategy. When you sell a put option is the you collect a premium like an insurance premium of sorts that you’re saying the stock will not fall dramatically. So if Apple is trading at one twenty five, let’s say, and you’re like, I don’t want to buy Apple at one twenty five, I’m more interested in buying it one fifteen, you would sell the one fifteen strike put and you would collect a premium of let’s say two hundred dollars. So if Apple stays above one fifteen on January expiration, let’s say, you have collected that two hundred dollar insurance premium. However, a drop below one 15 because you sold that put you would be on the hook to buy one hundred shares of one 15. You’ve sold the rate for somebody to sell you the stock at one fifteen. But you said but at the start of trade, you said, hey, I’m willing to buy stock at one fifteen, so I sell the one 15 put. So you kind of win in both scenarios. If the stock goes up or trade sideways, you click the insurance premium. If the stock drops to one fifteen and you get into the stock that you wanted to buy at one fifteen. So, yes, absolutely a totally fine strategy. People selling points get a very bad name, but it’s a totally good strategy to buy a stock at a lower price than it’s currently trading.
Chris Preston [00:41:57] Another question specifically about in the money covered calls from Amir, “Do you ever do those as there is more premium?”
Jacob Mintz [00:42:06] Yes, actually today. So the question today, literally about three hours ago for Cabot Options Trader, we sold an in the money PLTR option. That’s a way - PLTR is a very volatile stock. And by selling it in the money option, we gave ourselves a greater cushion should the stock fall. So it’s a way to get a big premium, buy yourself a little cushion if the stock were to fall. But in this case, I. I think I’m not going to get the details exactly right. But if the stock were to not fall below twenty four in the next month, we will have created a yield of about six seven percent if the stock were to stay above twenty four in the next month. with the stock and its trading about twenty seven right now. Good question.
Chris Preston [00:42:52] Yeah, very good questions today. I think we’ll we’ll end it there. Yeah, thanks for all the great questions from everyone today. And as as you can see on the screen, we’ll be back next month with a webinar from the oft mentioned Mike Cintolo. Our oft mentioned this with our Mike Cintolo, our growth investing expert. Mike will be talking about, quite simply, the best stocks to buy for 2021. And that’s definitely worth tuning into tuning into because Mike is often gets these things right for I don’t know how many straight years. He was just named one of the top ten market timers, by Market Timers Digest for 2020. So come back next month for that presentation. Again, that’ll be Thursday, January 21st at 2:00 p.m. Eastern. That does it for us, for Jacob Mintz and the entire Cabot Wealth Network team, I’m Chris Preston. And we’ll see you next time.