{"id":26771,"date":"2023-12-20T01:14:32","date_gmt":"2023-12-20T06:14:32","guid":{"rendered":"https:\/\/www.investorsradar.com\/?p=26771"},"modified":"2023-12-24T01:29:37","modified_gmt":"2023-12-24T06:29:37","slug":"the-poor-mans-covered-call-a-beginners-guide","status":"publish","type":"post","link":"http:\/\/www.investorsradar.com\/the-poor-mans-covered-call-a-beginners-guide\/","title":{"rendered":"The “Poor Man’s Covered Call”: A Beginner’s Guide"},"content":{"rendered":"\n
Unlocking Income with the “Poor Man’s Covered Call<\/strong><\/p>\n\n\n\n In the world of options trading<\/a>, the “covered call” strategy reigns supreme as a reliable income-generating tool. However, for investors with limited capital, the upfront cost of buying 100 shares to implement a traditional covered call can be a barrier to entry. Enter the poor man’s covered call (PMCC)<\/strong>, a clever strategy that cleverly utilize options contracts to simulate traditional call option portfolio structures while reducing the cost of entry.<\/p>\n\n\n\n What is a Poor Man’s Covered Call?<\/strong><\/p>\n\n\n\n The PMCC, also known as a synthetic covered call<\/strong> or a long call diagonal spread<\/strong>, is essentially a replica of a traditional covered call achieved through a combination of two options contracts:<\/p>\n\n\n\n By combining these two options, you effectively create a synthetic long position on the stock with a limited profit potential capped by the strike price of the short call. This allows you to capture premium income while still participating in potential upside movement of the stock price<\/a>, all with less upfront capital than a traditional covered call.<\/p>\n\n\n\n Benefits of the Poor Man’s Covered Call:<\/strong><\/p>\n\n\n\n Things to Consider Before Implementing a Poor Man’s Covered Call:<\/strong><\/p>\n\n\n\n Let’s walk through an example of the poor man’s covered call strategy:<\/strong><\/p>\n\n\n\n Assume you are interested in a stock called ABC Inc., which is currently trading at $50 per share. Instead of buying the stock, you decide to implement a poor man’s covered call strategy using options.<\/p>\n\n\n\n It’s essential to note that this example is simplified for illustrative purposes, and actual options trading involves various factors and complexities. It’s crucial to conduct thorough analysis, consider market conditions, and understand the potential risks before implementing any options strategy.<\/p>\n\n\n\n PMCC Buying Power Examples<\/strong><\/p>\n\n\n\n
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You purchase a long-term call option on ABC Inc. with a strike price of $50 and an expiration date one year from now. The cost of the long-term call option is $5 per contract. Each contract typically represents 100 shares of the underlying stock. So, you buy one contract for a total cost of $500 (100 shares x $5).<\/li>\n\n\n\n
To generate income and offset the cost of the long-term call option, you sell short-term call options against your long position. Let’s say you sell one short-term call option with a strike price of $55 and an expiration date one month from now. The premium you receive for selling this call option is $1 per contract. Again, each contract represents 100 shares, so you receive $100 (100 shares x $1) in premium.<\/li>\n\n\n\n
If the short-term call option you sold expires worthless (out of the money), you keep the $100 premium. This income helps reduce the net cost of your long-term call option position from $500 to $400 ($500 – $100).<\/li>\n\n\n\n
As the expiration date of the short-term call option approaches, you can repeat the process by selling another short-term call option against your long position. This generates additional income and further reduces the net cost of your long position.<\/li>\n\n\n\n
Throughout the strategy, it’s important to monitor the movement of the underlying stock price, as well as the value of the options. If the stock price rises significantly and approaches or surpasses the strike price of the long-term call option, adjustments may be necessary to manage risk or capture potential profits. You may consider rolling the short-term call option to a higher strike price, extending the expiration date, or closing out the position entirely.<\/li>\n<\/ol>\n\n\n\n<\/figure><\/div>\n\n\n