Lets review a strategy that is far too often overlooked in this newest post… how to trade a poor mans covered call.
The poor man’s covered call is an easy, low management, and relatively low risk strategy, traded the same as a classic covered call, only considerably cheaper. Let’s start by identifying a trade candidate.
To properly identify a poor man’s covered call, or any options trade really, you’ll have to determine what it is you hope to accomplish. For instance, in this trade I’d like to earn a 15% return on risked capital. Please note that 15% is aggressive and a smaller percentage is likely more appropriate.
1. Trade Identification
Start by finding an underlying asset to trade. For this example I’ll be using Nike. I trade it often and it’s one of my favorites to trade many different options strategies.
How to find a poor mans covered call trade.
Poor mans covered call trade example.
In the top image notice that Nike has entered a trading range. This, in my opinion is the most appropriate time to trade any variation of the covered call. For instance, the poor man’s covered call. If this trade were to end perfectly, I’ll need the price to remain just below my $55 short call, keeping my long call ITM and my short call OTM.
2. Trade Management
Now, before I move on, understand that not every trade will require management. In fact, some trades will require something much more complicated… Patience. So take those words to heart and don’t get to eager to adjust or alter the trade. Understand the parameters for a successful trade and let the trade work before altering the trade. Remember, at some point you believed in the position strongly enough to enter the trade.
What trade parameters? Simply… understand what loses money!
When considering how to trade a poor mans covered call it should be clear immediately that the position includes a long call option. Or, it includes an asset that will decay (lose value) as time passes. With this understanding, doesn’t it make sense to abandon a trade that is taking too long? It does…and it’s why I always set a time limit to reach my profit goal.
What about the short call side of the trade?
What happens if, in this example, Nike decides to take off to the upside? Well… I’d be giving up potential profit on the long call by keeping the short call open. What I’m saying is just be sure to understand the legs and the nuances that can affect the options position. That way, you’re better prepared to alter the trade when conditions become unfavorable to continue on the initial path.
One last thing, don’t forget about volatility and how that might wreck havoc. I won’t discuss it here other than to mention… Don’t forget about it!!
3. Taking profit/ Closing the Trade
At some point you’ll have to close the trade. Either taking profits or accepting defeat. However, if step two was adhered to closely the later should never occur.
Let’s have a look how our example trade has faired. Remember I’m wanting to earn 15% and I’ve risked $5.83 or $583. The difference between the price of the long call and the premium received for the short call.
How to take profit on poor mans covered call.
And there it is… As can be seen I was able to profit $97 dollars on this trade in just on day under a month. Some quick math will show that $97/$583 = 16.6% which is above my goal of 15%.
In the end, when determining how to trade a poor mans covered call you just need to be sure and understand the trade parameters. With that clear, the rest becomes easy to manage and trade profitably.
Have a question about the poor mans covered call options strategy, ask me in the comments below.
May God bless and keep your trading profitable,
Jeff the “OptionBoxer”
