Poor Man’s Covered Call | What is a Poor Man’s Covered Call?
The poor man’s covered call is a bullish options strategy that allows you to benefit from a stock rising and theta decay.
Key Takeaways
A Poor Man's Covered Call is an options trading strategy that seeks to replicate the payoff profile of a traditional covered call strategy using long-term options contracts, such as LEAPS.
The strategy involves buying a long-term call option on an underlying asset, and selling a short-term call option on the same asset, with a strike price that is higher than the strike price of the long-term call option.
The strategy can be attractive to investors who want to generate income from their stock holdings, but who may not have the capital or margin requirements to implement a traditional covered call strategy.
What is a Poor Man’s Covered Call?
The poor man’s covered call (PMCC) is a bullish options trading strategy that is viable even for smaller accounts.
Instead of owning 100 shares of stock like a regular covered call, you buy a long-term call option, which is cheaper.
Poor Man’s Covered Call vs. Covered Call
The poor man’s covered call is similar to the traditional covered call, except you sell a call against another call option rather than 100 shares of stock.
The poor man’s covered call requires much less capital than the traditional covered call since it is cheaper to buy a call option rather than 100 shares.
However, call options will expire, while shares you can hold forever. Therefore, it is much safer to own shares than a call since you will never have to worry about theta decay or an expiration date.
Overall, the traditional covered call is a much safer option, but there are times when a PMCC will outperform.
How to Set Up a Poor Man’s Covered Call
To set up a poor man’s covered call, the first step is to buy a call option with at least one year until expiration.
The call you buy should also be ITM with a delta of 70 or higher. The delta represents how many shares you are simulating with the call option.
A call option with a delta of 70 simulates 70 shares, but the greeks constantly change. Therefore, the delta will move up and down as the stock moves.
Poor Man’s Covered Call Risks
The risks of the PMCC strategy include theta decay on the long option and the inability to sell calls at a reasonable price.
Theta decay
Since you will own a call
Inability to sell calls at a reasonable price
You will be in a bad spot if you put on a poor man’s covered call and the stock drops hard. Your long call will have a lower delta, plus you won’t be able to collect much premium from selling calls.
When to Trade the Poor Man’s Covered Call
It is best to open a poor man’s covered call when you are bullish on a stock and expect it to rise.
The stock must increase in price soon after placing the poor man’s covered call to avoid losing too much value due to theta decay.
The idea of the poor man’s covered call is the short-term call loses value quicker than the long-term call, and you continually collect premium while also making money on the long-term call.
Poor Man’s Covered Call Example
Let’s take a look at an example trade of a PMCC with stock ABC trading at $100 per share.
Buy +1 $90 strike call at 500DTE for $20.00
Sell -1 $120 strike call at 45DTE for $0.50
If the stock moves up after placing this trade, the long call option will generate more gains than the short call loses.
Ideally, the short call decays, and the long call still moves up in value.
How to Calculate Max Profit and Breakeven on a PMCC
When you set up a PMCC trade, you want to ensure that you do not have any upside risk.
To be sure you don’t have any risk to the upside, the width of your strikes should be larger than the debit you pay.
In our example, the width of the strikes is 30 points wide, so you wouldn’t want to pay a debit of $30.00 or higher.
Alternate Options Strategies to Consider
While the poor man’s covered call is a decent strategy to consider, it is much risker than using a strategy like the wheel options strategy.
The wheel strategy combines the covered call and cash secured put and is an excellent way for beginners to learn how to trade options.
If you are a complete beginner to options trading, check out our article about the basics of call options.
How to Learn More About Options Trading
To learn more about options trading strategies, you should join a community of traders with experience trading the stock and options markets.
The free HaiKhuu Trading Community is one of the best and largest communities of traders online.
HaiKhuu Trading provides a live voice call daily, a proprietary trading algorithm, daily reports, and much more!
Tastytrade Disclosure
tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Marketing Agent (“HaiKhuu LLC.”) whereby tastytrade pays compensation to HaiKhuu LLC. to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of HaiKhuu LLC. by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of HaiKhuu LLC. or this website. tastytrade does not warrant the accuracy or content of the products or services offered by HaiKhuu LLC. or this website. HaiKhuu LLC. is independent and is not an affiliate of tastytrade.
tastytrade was previously known as tastyworks, Inc.
