Hello again, I hope God is at work in your life tonight in a way you never saw coming!
With that, I wanted to introduce you to a short call premium strategy that is exactly as the title would imply. A strategy that utilizes the poor mans covered call to always collect an income. Take notice that I didn’t say always take a profit. The possibility for loss is always present with options trading. However, take a look at the strategy in full below and I think you’ll be pleased to find the risk isn’t anywhere near that of the 1-1-2 trade I discussed in a previous post.
In any case, the strategy has proven to be quite profitable and the cash flow generation has been stellar. Let’s take a look.
Poor Man’s Covered Call (PMCC)
Before I introduce the short call premium strategy let’s quickly circle back for anyone that may not remember the construction of the PMCC strategy. In short, the trader will purchase a LEAPS option and sell an option at a different strike with an earlier expiration. In doing so we cap our upside potential on the long call but also offset the initial debit to some degree.
The PMCC is for those traders not able to, or not wanting to, outlay the initial capital to participate in a traditional covered call. The most notable difference between the two variations is the options expiration. With a PMCC you’ll always have to keep an eye on that LEAPS option to avoid any unnecessary time decay. On the other side, with a traditional covered call this isn’t a concern.
Additionally, here’s a post that goes a little more in depth for those that need the refresher on a poor man’s covered call.
Short Call Premium Strategy
I made up the name but I think it’s more than fitting to describe the strategy. Similar to the original PMCC the short call premium strategy requires a consistent management approach. There won’t be any set it and forget it with this one. The power of the strategy is realized as the share price fluctuates higher or lower while we adjust one or both legs for a net credit.
I think the easiest way to explain is with some images, in sequential order.
Week 1 – Initiate the Original PMCC – 12/23/22
Exactly as intended, here is the original PMCC at the outset of the trade. From here, we simply want the stock price to move higher or lower. We intended to adjust the position each week but I wouldn’t elect to micro manage the strategy. With this strategy there is plenty of flexibility as to when each week the trade is managed.
The idea is too always keep time on your side and of course, always take a credit!
Initial Debit – $6.68 or $668
Week 2- Adjustment – 12/30/22
After one week I’ve adjusted the short call higher from the $290 strike to the $295 strike to collect a credit of $.73 cents or $73. I forgot to include the days to expiration but you’ll notice it in the images that follow. Currently, the long strike has 259 days to expiry.
Initial Debit – $668 – $73 = $595
Week 3 – No Adjustment – 1/6/23
This week no adjustment was needed because price was flat. In this case, it wouldn’t make sense to add additional commission costs without the benefit of a price move. That is just my stance, the position could be adjusted for another credit, I just don’t see the need with more than enough time remaining.
Initial Debit – $668 – $73 = $595
Week 4 – Adjustment – 1/13/23
We had some work to do this week as I rolled both the short and the long strikes to collect a net $55 dollar credit. Additionally, going forward I’ll only include images when an adjustment is made.
Initial Debit – $668 – $73 = $595 – $55 = $540
Week 5 – No Adjustment -1/20/23
Initial Debit – $668 – $73 = $595 – $55 = $540
Week 6 – Adjustment – 1/27/23
Price took off to the upside, in this instance my short call was ITM and my long had increased in value. With that, I rolled the short call further out in time and rolled the long call out to collect the desired credit. Here it is.
Initial Debit – $668 – $73 = $595 – $55 = $540 – $136 = $404
Week 7 – Adjustment – 2/3/23
Again, price rose quickly forcing me to adjust both positions. Similarly, I rolled the short out in time and the long to a higher strike price.
Initial Debit – $668 – $73 = $595 – $55 = $540 – $136 = $404 – $40 = $364
Week 8 – No Adjustment – 2/10/23
Initial Debit – $668 – $73 = $595 – $55 = $540 – $136 = $404 – $40 = $364
Week 9 – Adjustment – 2/17/23
This week I was able to adjust a little differently. Instead of price ripping straight up I was able to roll my put out in time but also up in strike price. For a traditional covered call or PMCC this wouldn’t be ideal. For the short call premium strategy this is terrific because it also allowed me to roll my long to a higher strike. With the higher strike comes a better profit on that long if price continues to rise. Here are the adjustments.
Initial Debit – $668 – $73 = $595 – $55 = $540 – $136 = $404 – $40 = $364 – $61 = $303
Closing Thoughts
I think I’ll stop there as I’m beginning to run out of screen real estate to continue showing all the details. In short, you can see I was able to cut my initial debit down by more than 50% over the 9 week period. Further, you’ll also notice I could close this position today and realize a $12 dollar profit. Hardly impressive, but considering that there really isn’t a need to ever end the trade, it would only be a matter of time before each and every credit was just another paycheck.
Also, I didn’t track the total for commissions but I believe the total would be $13 dollars. Compared to a traditional covered call or PMCC the short call premium strategy would be considered commission heavy but relative to the never ending credit it’s hardly something to bat an eye over.
Throughout the brief 9 week demonstration above I never had to roll the long call to a longer dated expiration. This could be one area where a debit might occur but I’ve yet to have it happen. My assumption is a sharp price decline would need to result but in that instance volatility would also rise dramatically so the debit may be overshadowed by the additional premium from a new short contract.
In any case, I hope you enjoy the strategy and if you’re seeing this let me know what you think in the comments below.
**Lastly, for those that may ever read this sentence. First, thank you! Second, the strategy discussed here is the very same I have available on the webstore with the only difference being a walkthrough video to highlight some key points. I hope you’ll enjoy the free gift and I hope it keeps the cash flowing!**
God bless,
Jeff
