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

  • Options on Options

    Traders have long known that options can be opened on many different securities. Among the most ingenious of these are options on options. There are four types of these: call on a call (CoC), a call on a put (CoP), a put on a call (PoC), and a put on a put (PoP).

    By Michael C. Thomsett,

    • 0 comments
    • 255 views
  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 552 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 476 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 1,295 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 493 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 478 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 761 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 521 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 598 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 770 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