The Pitfalls Of The Poor Mans Covered Call




The Poor Mans Covered Call involves the buying of a LEAP call options and the frequent sale of short dated out of the money calls. Similar to a traditional covered call, the goal is income or cash flow. This also is a neutral to bullish strategy. Here though are some of the pitfalls of the Poor Mans Covered Call

  • Absence of Liquidity

Usually the spreads on long dated options can be really large. This is really noticeable in stocks with low liquidity. When the spread is too large, it just doesn’t make sense to try and take on the trade. The alternative is to move down closer to the share price. This though will reduce the delta which means the long call is not really a worthy stock substitution. Traditional covered all traders do not need to worry about these pitfalls.

  • Buying Theta

When one buys theta, the trade is against the clock. Obviously one does not have to worry about the “clock” when the trade goes in the right direction. However, it is when things go pear shaped when one has to think about selling or rolling the long dated call option. All options eventually end up worthless no matter how many years to expiration they may be. Again traditional stock holders do not have to worry about the time element here.

  • No Dividends In Poor Mans Covered Calls

When holding a long call for 2 years on end for example, one can’t collect dividend payments from the company. Dividend payments can reduce one’s cost basis if invested back into buying more shares. So one top of the time decay that eats into the option value every day, one also can’t collect dividends.

Summary

The only advantages which I can see from the Poor Mans Covered Call strategy are less capital requirements and the possibility of losing less if the share price falls off a cliff. The ends don’t justify the means here though. We recommend the traditional strategy. Low priced stocks which are undervalued, liquid and pay a dividend are the best stocks for traders to start using this strategy.

 

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3 Responses to The Pitfalls Of The Poor Mans Covered Call

  1. Viktor says:

    hmm, I was imagine you as older man… ( :
    What a smart, young man you are ( :
    Happy long life to you … and Thank you for the Gold post, 1240 as you said.

    • jacfoley says:

      We might test the lows here so be prepared for some volatility. We usually don’t have selling like this so early in a new cycle so a marginal new low could be on the cards. Remain Long

    • jacfoley says:

      Long life to you Sir also !

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