The poor man’s covered call options strategy is a variation of the traditional covered call strategy, which is a popular strategy used by options traders to generate income. In a traditional covered call strategy, traders sell call options on a stock they own to generate income. However, this strategy requires a substantial investment in the underlying stock, which can be a barrier for traders with limited funds.
The poor man’s covered call options strategy is designed to address this issue by using a long call option instead of buying the underlying stock. In this strategy, traders buy a long-term call option and sell short-term call options against it. This allows traders to generate income from the short-term options without having to invest a large amount of money in the underlying stock.
To implement the poor man’s covered call options strategy, traders first need to select a stock that they believe will remain stable or increase in price. Once they have identified a suitable stock, they can purchase a long-term call option with a strike price that is slightly higher than the current market price of the stock.
Next, traders sell short-term call options against the long-term call option they purchased. The strike price of the short-term call options should be higher than the strike price of the long-term call option, but still within a range that the trader believes is achievable in the short term.
The premium received from selling the short-term call options can be used to offset the cost of purchasing the long-term call option. If the price of the stock remains stable or increases, the short-term call options will expire worthless, and the trader can sell additional call options in the future to generate more income. If the price of the stock falls, the long-term call option will act as a protective buffer, limiting the trader’s losses.
In summary, the poor man’s covered call options strategy is a cost-effective way for traders with limited funds to generate income from the stock market. By using long-term call options instead of buying the underlying stock, traders can generate income from selling short-term call options without having to invest a large amount of money. However, like any trading strategy, there are risks involved, and traders should always do their research and understand the potential risks before implementing this strategy.
