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Poor Man Covered Call
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.

Directional Assumption: Bullish

Setup:
Buy an inthemoney (ITM) call option in a longerterm expiration cycle
Sell an outofthemoney (OTM) call option in a nearterm expiration cycle

The trade will be entered for a debit. It’s important that the debit paid is no more than 75% of the width of the strikes.

Example:
Stock at $100
Purchase (Expiration 2) 90 call for $15
Sell (Expiration 1) 110 call for $5
Net debit = $10.00 on a 20pointwide long call diagonal spread

Ideal Implied Volatility Environment: Low

Max Profit: The exact maximum profit potential cannot be calculated due to the differing expiration cycles used. However, the profit potential can be estimated with the following formula:

Width of call strikes net debit paid

How to Calculate Breakeven(s): The exact breakeven cannot be calculated due to the differing expiration cycles used in the trade. As a rough estimate, the breakeven area can be approximated with the following formula:

Long call strike price + net debit paid


Trade approach:
A Poor Man’s Covered Call is a fantastic alternative to trading a covered call. In smaller accounts, this position can be used to replicate a covered call position with much less capital and much less risk than an actual covered call.

The setup of a poor man’s covered call is very important. If we have a bad setup, we can actually set ourselves up to lose money if the trade moves in our direction too fast. To ensure we have a good setup, we check the extrinsic value of our longer dated ITM option. Once we figure that value, we ensure that the near term option we sell is equal to or greater than that amount. The deeper ITM our long option is, the easier this setup is to obtain. We also ensure that the total debit paid is not more than 75% of the width of the strikes.

We never route poor man’s covered calls in volatility instruments. Each expiration acts as its own underlying, so our max loss is not defined.

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#TradingOptions #PoorMansCoveredCalls #PMCC
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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