Poor Man's Covered Call Option Trading Strategy

 A poor man's covered call (PMCC) is a options trading strategy that is similar to a covered call, but it requires less capital. To create a PMCC, you will need to buy a long in-the-money (ITM) call option and sell a shorter-dated out-of-the-money (OTM) call option.

The long ITM call option acts similar to a long stock position because of its high positive delta. However, the call option has a much lower capital requirement than owning 100 shares of the stock.

The shorter-dated OTM call option is sold to generate income. If the stock price stays within a specific range, you will keep the premium you received for selling the OTM call option. However, if the stock price moves too much, you will lose money on the trade.

For example, let's say you want to create a PMCC on Apple stock. The current price of Apple stock is $210. You would buy a long ITM call option with a strike price of $205 and a expiration date of 6 months from now. You would also sell a shorter-dated OTM call option with a strike price of $215 and an expiration date of 3 months from now.

If Apple stock stays within the range of $205 to $215 at expiration, you will keep the premium you received for selling the OTM call option. This is because the options you sold will expire worthless, and the options you bought will be worth the premium you paid for them.

However, if Apple stock moves above $215 at expiration, you will lose money on the trade. This is because you will be obligated to sell your shares of Apple stock at $215, even though they are worth more than that.

The maximum profit for a PMCC is the premium you received for selling the OTM call option. The maximum loss is limited to the difference between the strike price of the long ITM call option and the price you paid for it.

PMCCs are a good option for traders who want to generate income from a stock they already own, or who want to limit their capital requirements. They are also a good way to profit from a sideways market. However, PMCCs also have limited profit potential.

Here are some of the advantages of using a PMCC strategy:

• Limited capital requirements: PMCCs require less capital than traditional covered calls, as you do not need to own 100 shares of the stock.
• Profitable in sideways markets: PMCCs can be profitable in sideways markets, where the underlying asset does not move much.
• Easy to execute: PMCCs are relatively easy to execute, as they can be created with a single trade.

Here are some of the disadvantages of using a PMCC strategy:

• Limited profit potential: The maximum profit for a PMCC is the premium you received for selling the OTM call option.
• Not suitable for all markets: PMCCs are not suitable for all markets, as they will not be profitable if the underlying asset moves too much.
• Requires careful management: PMCCs require careful management, as you need to monitor the underlying asset and close the trade if it moves outside of your desired range.

Overall, PMCCs are a versatile options trading strategy that can be used to profit from a variety of market conditions. However, it is important to understand the risks involved before using this strategy.