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

  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

    • 7 comments
    • 603 views
  • What Trading Can Offer To A Newcomer

    For any first-time investor, one of the most important questions to ask is “why are you doing this?”. Getting into investment can be thrilling and open up new worlds for you, but it can also be draining both physically and emotionally, with long days and sudden market moves always a genuine risk.

    By Kim,

    • 0 comments
    • 102 views
  • Updated: The Performance Gap Between Large Growth and Small Value Stocks

    Eight months ago on July 21st 2020 I posted an article, The Performance Gap Between Large Growth and Small Value Stocks. Over the long-term small cap value stocks have outperformed large cap growth stocks, although not over more recent history.

    By Jesse,

    • 0 comments
    • 263 views
  • 6 Ways to Invest Your Money That Aren't Cash Savings

    It’s always a good idea to keep some of your money in cash so if there is an emergency and you need money in a hurry, you can access it without having to worry. However, cash savings are not your only option if you have money left over at the end of the month, and there are a lot of other options that could bring greater returns.

    By Kim,

    • 0 comments
    • 320 views
  • Jade Lizard Options

    The jade lizard is one of those bullish spreads with limited maximum profit, and no risk on the upside. It is a combination of a short put with a short call spread . The credit this creates is higher than the span of the spread. To set this up, two actions are required:

    By Michael C. Thomsett,

    • 0 comments
    • 547 views
  • Are Your Emotions Trying To Tell You Something?

    As a trader, you may find yourself frequently trying to ignore or rationalize emotions.  You may have even created your own “solutions” to manage them. You exit early to lock up profit and avoid a potential blow-up if the trade turns against you.

    By Jared Tendler,

    • 0 comments
    • 360 views
  • Stock Trading Basics: 5 Rules for Successful Stock Trading

    You might be a stock trader, or just interested in learning more about how to trade and make the most out of your stock investment. Regardless, successful stock trading is not that easy. You must first have the financial capital to start and a very great endurance for risks.

    By Kim,

    • 2 comments
    • 505 views
  • Hourly Financial Advice for DIY Investors

    A large percentage of the Steady Options community consists of do it yourself (DIY) investors who prefer to manage their own trading and long-term investing accounts. This is a great way to gain firsthand experience about how markets work, but at times it may be beneficial to get professional input on investing and other personal financial planning decisions.

    By Jesse,

    • 0 comments
    • 309 views
  • Seagull Spreads

    Some varieties of call and put spreads are also called seagull spreads. It is so called because it contains a body and two wings. If the body is short, the wings are long, and vice versa. This 3-contract strategy includes two calls and a put, or two pouts and a call.

     

    By Michael C. Thomsett,

    • 0 comments
    • 435 views
  • Are Hedge Funds Good Investment for You?

    Right now, people are feeling at a bit of a loss as to what to do with their money. Those who usually invest are probably well aware that the market is pretty tricky right now. During unprecedented times, there are often unprecedented outcomes when it comes to investments.

    By Kim,

    • 0 comments
    • 436 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 Expertido