Let’s face it….everyone talks about covered calls like they’re the secret to printing money from the stock market. But let’s get real. Do you really want to be the guy who needs to save up $22,000 to buy Apple shares just to make a measly ~$250 a month in premium? Sure, you might come out ahead in the long run, but for those living off a Wendy’s paycheck (and without the social skills to join the elite club), that’s just not feasible.
Well, guess what? You don’t need $22K to make money with covered calls. Enter the Poor Man’s Covered Call..the trader’s secret weapon for making money in the stock market with way less capital and less risk. It’s like covered calls, but on a budget!
What is the Poor Man’s Covered Call (PMC) Strategy?
You might be asking, How does this magic work? Simple. Instead of buying 100 shares of stock to sell covered calls (which requires a LOT of capital), you buy a long call option (a fraction of the cost), and sell a call against it. This allows you to collect premium like you would with regular covered calls, but you’re using way less capital.
And the best part? You’re still leveraging big upside potential…..it’s like driving a Ferrari with a go-kart engine, but you still get all the fun without the insane price tag.
Step-by-Step Example: Apple
Let’s break it down using Apple as an example. Here’s how a Poor Man’s Covered Call would go down:
- Step 1: Forget about buying 100 shares of Apple (because we’re broke, remember?). Instead, buy a ITM long call option with a ~12-month expiration.
- This costs you way less than buying 100 shares of Apple, but it still gives you exposure to Apple’s price movement.
- Step 2: Now, sell a call option against that long call.
- Boom. You’re now collecting premium, but without needing to own 100 shares. Plus, you have more leverage than if you were just holding shares.
Why is This Strategy So Awesome?
- Low Capital, High Potential: You’re not shelling out tens of thousands for shares. A small investment lets you leverage stock movement and still collect premium.
- More Leverage: The long call option gives you more bang for your buck, offering greater potential gains compared to just holding stock.
- Low Risk: Sure, there’s more risk than just holding shares, but you can hedge that risk by selling options against your long call.
Critical Tips to Make the Poor Man’s Covered Call Work
- Implied Volatility (IV) is Your Friend:
- Look for stocks with low IV compared to their historical averages. Why? Because when IV rises, the value of your long call increases.
- Pro Tip: If a stock’s IV is below its 252-day average, it’s likely that IV will rise….making your long call more valuable.
- Theta Decay—Don’t Panic!
- Options lose value over time (called Theta decay), but don’t worry. If you buy long calls with long expiration periods, Theta decay will be much slower.
- The goal here is to wait for your long call to increase in value while you collect premium by selling shorter-dated calls.
- Profit Taking – It’s All About Timing:
- When your short call hits 50% profit, it’s time to take the profit and move on to the next one. If you hold too long, time works against you, and you’ll lose potential profit.
- Rolling – The Secret Weapon:
- Sometimes your short call will get too close to being assigned (meaning you have to sell your shares). When this happens, you can roll your position….close the short call and open a new one with a different strike price or expiration.
- You can roll up (to a higher strike), roll down (to a lower strike), or roll out (to a later expiration). This keeps you in the game and prevents assignment.
Can You Bet on Stocks Going Down?
Yes! With Poor Man’s Covered Puts, you can actually bet that stocks will go down. If you think a stock is going to fall, you can buy a put and sell a short put against it…just like you’re doing with calls, but on the downside.
The Poor Man’s Covered Call: It’s Not Just for Rich Folks
Here’s the beauty of this strategy: you don’t need $22,000 to get started. Whether you’ve got a small account or just want to test the waters, the Poor Man’s Covered Call lets you tap into the power of covered calls without draining your bank account.
Why This Strategy Is the Real Deal:
The Poor Man’s Covered Call is an incredible way to make consistent money while managing your risk. You’re not throwing all your money into a stock, just enough to control the movement of the stock and sell premium.
It also helps you bet on stocks going down (with Poor Man’s Covered Puts), and it’s an affordable way to play the options market without needing a huge account.
Bottom Line:
If you’re tired of the traditional covered call strategy that requires a huge initial investment, the Poor Man’s Covered Call is your ticket to trading smarter without the huge price tag. It’s the perfect way to leverage stock movements and collect premium while minimizing your risk and investment.