Poor Man's Covered Call

Submitted by admin on Thu, 11/25/2021 - 21:04

A "Poor Man's Covered Call" is a Long Call Diagonal Debit Spread that mimics a Covered Call trade.
The strategy's name comes from the fact that it has a lower risk and capital need than a regular covered call.

Bullish Directional Assumption

Purchase an in-the-money (ITM) call option with an extended expiry period.

In a near-term expiry cycle, sell an out-of-the-money (OTM) call option.

The transaction will be recorded as a debit.
It's critical that the debt paid equals no more than 75% of the striking width.

Purchase of $100 worth of stock, for example (Expiration 2)
Sell for $15 on 90 calls (Expiration 1)
On a 20-point-wide long call diagonal spread, a 110 call for $5 net debit Equals $10.00

Low implied volatility environment is ideal.

Due to the different expiry cycles employed, the precise maximum profit potential cannot be computed.
The profit potential, on the other hand, may be calculated using the following formula:

Call strike width - net debit paid

How to Work Out Your Breakeven Point(s):
Due to the several expiry periods employed in the deal, the precise break-even cannot be computed.
The break-even area can be calculated with the following formula as a preliminary estimate:

net debit paid + long call strike price


A Poor Man's Covered Call is an excellent substitute for trading covered calls.
This position can be used to mimic a covered call position in smaller accounts with far less cash and risk than a real covered call.

It's crucial to set up a poor man's covered call correctly.
If we have a poor setup, we may set ourselves up to lose money if the transaction goes too quickly in our way.
We verify the extrinsic value of our longer-dated ITM option to ensure we have a suitable arrangement.
We make sure that the near-term option we sell is equal to or more than that amount once we've calculated it.
The more ITM we have in our long option, the easier it is to get this configuration.
We also make sure that the total debit paid does not exceed 75% of the strike width.

In volatility instruments, we never route poor man's covered calls.
Our maximum loss is not determined because each expiry functions as its own underlying.