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

Focus: STRATEGIES

Andy Crowder Image Andy Crowder Editor, Wyatt Investment Research

Let’s use the $52.5 strike for our example.

chart 1

We can buy one options contract, which is equivalent to 100 shares of MO stock, for roughly $14.60, if not cheaper. Remember, always use a limit order – never buy at the ask price, which in this case is $15.30.

If we buy the $52.50 strike for $14.60 we are out $1,460, rather than the $6,573 we would spend for 100 shares of MO. That’s a savings on capital required of 81.5%. Now we have the ability to use the capital saved ($5,113) to work in other ways.

The next step is to sell an out-of-the-money call against our LEAPS contract.

chart 1

It seems as though the only call strike worth selling in MO is the September $67 strike with 36 days left until expiration. Options Code, as seen in the options chain above is MO170908C67.

So, let’s say we decide to sell the $67 strike for $1.05, or $105, against our $52.50 LEAPS contract.

Our total outlay or risk now stands at $1,355 ($52.5 LEAPS contract minus $57 call).

We can continue to sell calls against our LEAPS contract every month or so to lower the total capital outlay. But remember, options have a limited life, so when we get closer to the LEAPS contract’s expiration we will simply sell the contract and use the proceeds to continue our poor man’s covered call strategy.

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