Strategy

Poor Man's Covered call

Fig Leaf, Leveraged Covered Call

Type of Strategy

trading / investing

sentiment

bullish / neutral

implied volatility

varied

example

XYZ at $95.  Buy a 90-DTE $85 Call for $12.  Sell a 45-DTE $100 Call for $2.

boundaries

max loss = $10 ($12-$2)     

max profit = undefined 

Breakeven ~ $95     (Long Strike + Debit Paid)

description

Rather than owning the underlying outright as in a standard covered call, a PMCC replaces the underlying stock position with an ITM long call position.  The expiration of the long call position must be further dated than the expiration of the short call position.

Set-Up

Purchase a longer-dated ITM call option and sell a shorter-dated ATM or OTM call option.

In standard PMCC setups, a 70-90 delta call option with 60-180 days to expiration is purchased as the underlying security.  Nearer-term 30-45 DTE call options at 10-30 delta are sold against the position.  If a near-term short call expires worthless, a new 30-45 DTE call option can be sold against the long call.

In establishing the PMCC, the first general standard is to ensure that the extrinsic value of the short call option is minimally equal to the extrinsic value of the long call option.  Next, the net debit paid for the position should be no more than 75% of the distance between the long call and short call strikes.

Soi perspective

The poor man’s covered call is a flexible strategy that often lies at the intersection of trading vs. investing.  While the standard PMCC uses a long call option with ~60-120 DTE, LEAP options may be used for the underlying as a stock substitute, with near duration, low delta short call options sold to cover the extrinsic value of the LEAP option.  This variation is detailed in the Dragon LEAPs strategy.

PMCC profile as of short call expiration

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