POOR MAN COVERED CALL

What is covered call?

Before I explain what is poor man covered call, we have to know some of the basis terms used in the world of options. From the Term, Poor man covered call, you’ll know that there is covered call involved. So what is covered call?

According to this extracted from Investopedia, The term covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. The key here is the investor owns an equivalent amount of the underlying security. And the same investor then writes (sells) call options on that same asset to generate an income stream. Because when you sell call options, the buyer of that option pays you an amount which is called the premium. The investor's long position in the asset is the cover because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. And this is very important for me. I will never sell covered call position if I don’t have the underlying security. A naked call is an options strategy in which an investor writes (sells) call options on the open market without owning the underlying security. And Naked call can result in huge uncontained losses. In options trading, its all about the possibilities over the probabilities. For me, I can’t take the possibility of a naked call going wrong. That’s why I don’t do it.

Weathered Man
Stock Market Chart

POOR MAN COVERED CALL

Key takeaways of covered call

So here’s some Key Takeaways of Covered Call, A covered call is a popular options strategy used to generate income in the form of options premiums.


Covered calls are often employed by those who intend to hold the underlying stock for a long time but do not expect an appreciable price increase in the near term. For me, I’ll adjust the strike price according to how bullish I am for the underlying stock for that month. To execute a covered call, an investor holding a long position in an asset then writes (sells) call options on that same asset.

Big Ben Clock

POOR MAN COVERED CALL

What is LEAPs

The Next important term we need to know is LEAPS. Leaps are basically Long-term equity anticipation securities are publicly traded options contracts with expiration dates that are longer than one year. Investors can purchase a LEAP call option contracts instead of shares of stock in order to get similar long-term investment benefits with less capital outlay.

 

Substituting a financial derivative for a stock is known as a Stock Replacement strategy, and is used to improve overall capital efficiency. That’s the main objective for me. I like using less capital to achieve similar or better results.

POOR MAN COVERED CALL

What exactly is PMCC?

Now we come to the most important part of all the explanations. So what is Poor man covered call?

In professional terms, A "Poor Man’s Covered Call" is a Long Call Diagonal Debit Spread that is used to replicate a Covered Call position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered call.

Generally I only do poor man covered call when I’m bullish on the stock on a longer term basis. Means if I think the stock will not go down anymore after I entered the trades. However most of the time I’m wrong. Nobody can know where the market is going. Its all about handling the different possibilities that might arise after you entered a trade. And that is the key to be successful option trader. Its about know how exactly to respond whether a trade goes against you or not. I’m still learning and so lets learn together

Happy Farmer