My Step-by-Step Approach to Poor Man’s Covered Calls

Focus: STRATEGIES

Andy Crowder Image Andy Crowder Editor, Wyatt Investment Research

There is an alternative to a covered call strategy. And it’s a good one. In the options world, the strategy is known as poor man’s covered call, notes options specialist Andy Crowder, editor of Wyatt Research’s The Strike Price.


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Most of us have used ̶ or at least heard about ̶ covered calls.

Buy a stock, sell calls against it.

It’s an easy strategy to implement, but the problem, at least for some, comes down to capital. You must have at least 100 shares of stock to sell a call. For some, acquiring 100 shares just isn’t affordable. Others prefer not to tie up working capital toward 100 or more shares of stock.

There is an alternative to a covered call strategy. And it’s a good one. In the options world the strategy is referred to as poor man’s covered call.

A poor man’s covered call is similar to a traditional covered call strategy, with one exception in the mechanics. Rather than buying 100 or more shares of stock, an investor simply buys an in-the-money LEAPS call and sells a near-term out-of-the-money call against it.

LEAPS, or long-term equity anticipation securities, are basically options contracts with an expiration date longer than one year. LEAPS are no different than short-term options, but the longer duration offered through a LEAPS contract gives an investor the opportunity for long-term exposure.

Other than reducing the capital required, the reason we purchase LEAPS is to minimize the extrinsic value and theta decay.

 
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