Poor Man’s Covered Call Option Strategy
What are the characteristics of this option strategy?
The Poor Man’s Covered Call Option Strategy is a simple options trading strategy that involves buying a deep-in-the-money call option of distant expiration and writing an out-of-money call option against it of near expiry. The strategy aims to bet on a bullish view of stock without buying actual stock and generate income from the premium collected for the option sold.
Is this a bullish, bearish, or neutral strategy?
The Poor Man’s Covered Call Option Strategy is typically a bullish strategy. It is used when a trader has an opinion on the upside direction of the underlying asset. The strategy will either profit if the underlying asset rises or try to cover losses if it falls by selling an out-of-the-money call option.
Is this a beginner or an advanced option strategy?
The Poor Man’s Covered Call Option Strategy is not suitable for new traders. Despite being a fairly simple strategy to understand, it can be used to generate consistent profits over the long run. It also requires a certain level of knowledge in order to minimize losses and maximize profits when things go against you.
In what situation will I use this strategy?
The Poor Man’s Covered Call Option Strategy should be used when expecting the underlying asset to make a slight upside move rather than a large directional move. This could be due to a lack of a one-direction upside move of the asset or when you prefer to take profits sooner rather than later.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Poor Man’s Covered Call Option Strategy typically falls within a low-risk, low-reward, and moderate probability of profit. This is due to the limited downside risk the strategy is exposed to and the income generated from the option premium sold.
How is this strategy affected by the greeks?
The Poor Man’s Covered Call Option Strategy is often exposed to Delta and Theta risk. Delta measures the sensitivity of the options’ value to changes in the underlying assets’ price, and Theta measures the rate of time decay. The strategy is also exposed to Gamma risk, although to a much lesser extent.
In what volatility regime (i.e., VIX level) would this strategy be optimal?
The Poor Man’s Covered Call Option Strategy can be used in slightly bullish market conditions. However, it is typically more profitable in high volatility conditions since collecting more option premiums in these situations is easier.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Poor Man’s Covered Call Option Strategy, when it goes against you, is relatively straightforward. Depending on the situation, you can either close the position, roll the options to different expiration dates, or move further down your target strike price.
Where does this strategy typically fall in the range of commissions and fees?
The cost of trading options is generally higher than trading stocks, so the commissions and fees associated with the Poor Man’s Covered Call Option Strategy will typically be lower than directly trading stocks.
Is this a good option income strategy?
Yes, the Poor Man’s Covered Call Option Strategy is a good option income strategy as it allows traders to generate an income while limiting their downside risk regularly.
How do I know when to exit this strategy?
The appropriate exit strategy for the Poor Man’s Covered Call Option Strategy depends largely on the individual’s goals and risk tolerance. Generally, the in-the-money option will be sold at a max profit, or the out-of-the-money option will be repurchased, and the option will expire worthless.
How will market makers respond to this trade being opened?
Market makers generally have no opinion on the trade being opened as they will always try to remain neutral and make a profit from the spread between the bid and ask prices. Therefore, they are unlikely to be taking a view on the strategy’s success.
What is an example (with calculations) of this strategy?
For example, suppose a trader wants to execute the Poor Man’s Covered Call Option Strategy on company MSFT trading at $272. In that case, they will first buy an in-the-money call option of MSFT with a strike price of $230 having an expiration date of 90 days at the market price of $46.8 and then sell a one-call option with a strike price of $290 with an expiration date of one month from now for a premium of $2.17 per share. The maximum profit for this strategy will be the premium collected (in this case $217) plus any appreciation of the in-the-money to the strike price (in this case $290), less any losses resulting from the premium paid and commissions. On the other hand, the maximum loss would occur if the underlying asset price falls below the strike price at expiration (in this case, $230).
MarketXLS:
MarketXLS is a great tool for implementing the Poor Man’s Covered Call Option Strategy. It provides powerful analytics, such as options pricing, probability of profit and historical volatility data, which traders can use to accurately assess the risks and rewards of any options trade. Furthermore, MarketXLS’s real-time Option Chain offers streaming option market pricing for over 4,000 stocks and ETFs. This makes finding the optimal options prices for entry and exit strategies much easier.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
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