SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Leverage With A Poor Man’s Covered Call


Diversification can be an issue for traders with smaller account sizes. It can be incredible difficult to trade covered calls and create a diversified portfolio. For example, an investor with a $25,000 account would use up over half his capital doing one covered call on AAPL stock.

 

That’s fine if you’re super bullish on AAPL and are happy with that exposure, but it’s not great diversification.

 

Thankfully there is a way to trade this popular income strategy and still maintain some level of diversification.

 

A poor man’s covered call is like a regular covered call but requires only a fraction. It’s like taking a leveraged position, so the returns in percentage terms will be amplified.

 

Below are some advantages and disadvantages of a poor man’s covered call over a regular covered call.
 

 image.png

I like using this strategy with ETF’s, that way you have built in diversification.

 

For examples, I could set up a pretty well diversified portfolio by trading poor man’s covered calls on the following ETFS:

 

Bonds – TLT

Real Estate – IYR

US Stocks – SPY

Emerging Markets - EEM

 

With 4 underlying ETFs and not a whole lot of capital, I have set up a diversified portfolio that generates income through selling call options.

 

Let’s look at some examples:

 

AAPL

 

Earlier we looked at the amount of capital required for one covered call trade on AAPL stock which would be around $17,300.

 

Let’s compare a standard covered call with a poor man’s covered call:

 

AAPL COVERED CALL

 

Trade Date: Feb 15th, 2018

 

AAPL Price: $172.99

 

Trade Details:

Buy 100 AAPL Shares @$172.99

Sell 1 March 16th, 2018 $180 Call @ $1.60

 

Total Paid: $17,139

 

Fast forward to March 10th and the AAPL shares are now worth $17,985 and the call has only gone up to $1.71. That means the total position is now worth $17,814 for a gain of $675.

 

This represents a gain of 3.94%. Not bad!

 

AAPL POOR MAN’S COVERED CALL

 

Let’s now take a look at how the poor man’s covered call has performed. Instead of forking out $17,299 for 100 shares, we use an in-the-money LEAP call option.

 

Trade Date: Feb 15th, 2018

 

AAPL Price: $172.99

 

Trade Details:

Buy1 January 17th, 2020 $140 Call @ $43.00

Sell 1 March 16th, 2018 $180 Call @ $1.60

 

Total Paid: $4,140

 

Let’s see how this position compares on March 10th. The $140 call has increase in value from $43 to $49.50 and the short call from $1.60 to $1.71.

 

The total position is now worth $4,779 for a total gain of $639 which represents a percentage gain of 15.43%.

 

By utilizing the poor man’s covered call, we have managed to generate a similar dollar return, while using only a fraction of the capital.

 

Leveraged Covered Call
 

Let’s now take a look at a time when AAPL stock went down.

 

AAPL COVERED CALL

 

Trade Date: Jan 29th, 2018

 

AAPL Price: $167.28

 

Trade Details:

Buy 100 AAPL Shares @$167.28

Sell 1 March 16th, 2018 $175 Call @ $4.35

 

Total Paid: $16,293

 

On Feb 9th, AAPL reached a low of $150.24 and the March $175 call had dropped to $0.50.

 

The net position was worth $14,974, a decline of $1,319 or 8.10%.

 

AAPL POOR MAN’S COVERED CALL

 

Let’s now take a look at how the poor man’s covered call held up.

 

Trade Date: Feb 15th, 2018

 

AAPL Price: $172.99

 

Trade Details:

Buy 1 January 17th, 2020 $140 Call @ $41.70

Sell 1 March 16th, 2018 $175 Call @ $4.35

 

Total Paid: $3,735

 

On Feb 9th, with AAPL trading at $150.24, the LEAP call had dropped to $31.35. With the short call trading at $0.50, the net position was worth $3,085 for a loss of $650.

 

This loss represents a -17.40% return on capital at risk which is worse in percentage terms than the regular covered call.

 

BUT, the dollar value loss is only half that of the regular covered call. Part of the reason for this is the rise in volatility, which would have given a small benefit to the long call holder.

 

It doesn’t always work out like this, but in both of these examples, the poor man’s covered call was the better trade. In the first instance, the poor man’s covered call made a similar return while using much less capital. In the second example, the dollar loss was much less, half in fact, than the regular covered call.

 

Poor man’s covered calls are one of my favorite trading strategies. Traders can achieve excellent returns, but they need to be aware that percentage losses on the downside are magnified as well.

 

If you want to check out a detailed example of a poor man’s covered call that played out over the course of a year, you can do so here.

 

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter. 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • What’s Wrong With Your 401(k)? (If anything)

    There currently are over sixty million Americans that are active 401(k) participants, and well over 500,000 total active 401(k) plans offered by employers in the United States.  Despite these high numbers, usages could be higher, as the US Census Bureau estimates that only 41% of all employees with access to a 401(k) plan utilize it, with even less funding it fully.

    By cwelsh,

    • 0 comments
    • 92 views
  • Upcoming Decay of Options

    I am on the hunt for a short volatility position for three main reasons. First, the market’s wild swings have, for the time being at least, diminished. Second, option activity has dried up as my options barometer continues to be stuck in the 4 – 6 range as traders are not making big bets in either direction.

    By Jacob Mintz,

    • 0 comments
    • 156 views
  • The Scientific Process of Increasing Expected Returns

    For many US investors, the "base case" for equity investing is US large cap stocks, most commonly benchmarked as the S&P 500. You could absolutely do far worse than owning these 500 great US companies, and the weight of the evidence suggests that most actively managed mutual funds that benchmark themselves against the S&P 500 index have in fact done worse.

    By Jesse,

    • 0 comments
    • 292 views
  • Those Golden and Death Crosses

    The use of moving average (MA) for predicting future price behavior must be undertaken cautiously. MA is a lagging indicator, so the question must be: Can a lagging indicator provide guidance for the future? Yes. The use of two MA lines and how they interact is a reliable form of reversal indicator.

    By Michael C. Thomsett,

    • 0 comments
    • 267 views
  • Trading Reverse Iron Condors When IV Is Elevated

    Our members know that pre earnings straddles and calendars have been our bread and butter strategies in the recent years. We enter those trades when the prices are cheap compared to previous cycles. However, in the last few months of 2018, Implied Volatility exploded, making most of those trades too expensive.

    By Kim,

    • 0 comments
    • 306 views
  • How To Short Volatility The Right Way

    Shorting volatility in 2017 was easy money. In fact, it was easy money every year since 2010 when iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) has been created. Just go short VXX, buy puts or put debit spreads, and you would make money every year since 2010.

    By Kim,

    • 12 comments
    • 897 views
  • Leveraged Anchor Implementation

    This week Steady Options implemented the newest iteration of the Anchor trades – the Leveraged Anchor. This will now officially be tracked. We will also continue to track the Traditional Anchor as well. It is our belief that the Leveraged Anchor will perform better, on a risk adjusted basis than Anchor has, particularly on the upside of the trade.

    By cwelsh,

    • 0 comments
    • 780 views
  • 2018: A Year To Remember

    Making money in the stock market in 2017 was easy. Pick almost any stock or index. Buy calls. Sell put credit spreads. Almost any bullish or slightly bullish strategy would work. Everyone was a genius trader. Then came 2018. US stocks posted its worst year in a decade. Volatility exploded. 

    By Kim,

    • 0 comments
    • 529 views
  • SteadyOptions 2018 - Year In Review

    2018 marks our seventh year as a public service. It was an excellent and exciting year. We closed 124 winners out of 161 trades. Our model portfolio produced 129.5% compounded gain on the whole account based on 10% allocation per trade. The winning ratio was 77.0%. We had only one losing month in 2018. 

    By Kim,

    • 0 comments
    • 1,218 views
  • Systematic vs. Discretionary Trading

    Much of the discussion in finance is about "active" vs. "passive". Active management typically uses security selection and/or market timing to make portfolio management decisions. Passive management typically does not, instead, focusing on market risk premiums as the source of expected return. So which is better?

    By Jesse,

    • 0 comments
    • 613 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs