Poor Man’s Covered Call

Poor Man’s Covered Call outlines, a Long Call Diagonal Debit Spread strategy, which is suited for those, who wish to profit using the covered call strategy, but don’t have enough capital at hand, to buy 100 shares of the underlying stock.

Firstly, you would buy an in-the-money call, that has a delta of at least 70 (70% chance of being in-the-money at expiration), and is 3-12 months from expiration. As time decay doesn’t affect option premium, as much as calls that are closer to expiration.

This being the case, you would then sell an out-of-money call, that has a delta of around 30 (30% chance of being in-the-money at expiration), and has 30-45 days until expiration, as time decay accelerates closer to expiration.

When your short call hits 50% profit, it’s best to close that position, take profit, and sell a new call. If you dont, there is more time relative to how much profit you can make.

If it looks like your short call will be in-the-money at expiration, you may want to close your short call, and sell a new call, which is known as rolling. For example, if you think your short call will be in-the-money at expiration, and don’t want to run the risk of assignment, close your short call position, and open a new one with a higher strike price.

Now to the pros and cons of this strategy. The Pros of using this strategy are as mentioned earlier being able to execute this strategy with low capital but also downward risk is limited to the bought calls premium. The Con associated with this strategy is your profit will be limited.

Poor Man’s Covered Call Conclusion

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Image purpose is to reinforce how the Poor Man's Covered Call strategy gives traders the opportunity to replicate the covered call strategy.