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

Focus: STRATEGIES

Andy Crowder Image Andy Crowder Editor, Wyatt Investment Research

Basically, a poor man’s covered call is viewed as a diagonal trade with a significantly longer duration.

 

First of all, I always start – just like when I use a traditional covered call strategy – by choosing a low-beta stock. I want a stock with low volatility because the strategy works best when there is minimal vacillation in the underlying stock.

Take for instance Altria (MO). The stock has experienced a recent pullback, which could offer a nice entry point for a poor man’s covered call.

chart 1

The stock exemplifies the typical low-beta, blue chip stock that I look for when using a poor man’s covered call strategy.

The next step is to choose an appropriate LEAPS contract to replace buying 100 shares of MO stock.

If we were to buy MO stock at $65.73 per share, our capital requirement would be a minimum of $6,573 plus commissions ($65.73 times 100 shares).

If we look at MO’s option chain, we will quickly notice that the expiration cycle with the longest duration is the January 2019 cycle, which has roughly 533 days left until expiration.

chart 1

With the stock trading at $65.73 I prefer to buy a contract that is in the money at least 10%, if not more.

 
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