Is the poor man's version of covered bullish options really cost-effective? A comprehensive analysis of low-cost option strategies

Image Source: pexels

You may wonder, is the Poor Man’s Covered Call really worth it? Compared to the traditional covered call strategy, this approach has a clear low-cost advantage.

• You can use a long-term, deep in-the-money call option instead of holding the underlying stock, reducing capital investment.
• The traditional strategy typically requires holding a large number of shares, which has a high capital threshold.

The Poor Man’s strategy requires only a few thousand dollars, making it suitable for investors with limited funds while offering higher leverage effects.

Key Points

• The Poor Man’s Covered Call (PMCC) allows you to participate in options trading with less capital, suitable for investors with limited funds.
• By selling short-term call options, you can continuously collect premiums, enhance cash flow, and reduce holding costs.
• Understanding the profit and loss range is critical, with the maximum loss being the cost of the long-term call option, and regular review of position performance is necessary.
• In bull or range-bound markets, the PMCC strategy can generate stable cash flow, helping you stick to long-term investments.
• Choosing highly liquid underlying stocks and appropriate LEAPS options can effectively improve the strategy’s success rate.

Strategy Overview

Covered Call Logic

You can use the covered call strategy to use the underlying assets you hold as collateral to sell call options and earn premiums. This method is suitable when you expect the market to be neutral to slightly bullish. When you believe the underlying asset’s price will not rise significantly but may increase slightly or remain flat, this strategy is more effective.

Common uses of covered calls include enhancing returns and providing additional cash flow for long-term stock holdings. You can choose dividend-paying or blue-chip stocks as the underlying asset and avoid highly volatile stocks.

• When market volatility decreases, selling call options is more advantageous.
• By collecting premiums, you reduce holding costs and improve overall returns.

Low-Cost Advantage

The Poor Man’s Covered Call (PMCC) allows you to participate in an options strategy with less capital. You don’t need to directly buy 100 shares of the underlying stock; instead, you purchase a long-term, deep in-the-money call option (LEAPS Call) to replace holding the stock.

• For example, you purchase an AAPL LEAPS Call for about $6,500, far less than the $18,000 required to buy 100 shares of AAPL.
• You can regularly sell short-term calls to collect premiums and generate continuous cash flow.
• This approach is suitable for investors with smaller capital, allowing you to implement the core logic of a covered call with limited funds.
  You will find that PMCC is similar to the traditional covered call in terms of profit structure but has a lower capital threshold and more pronounced leverage effects. You can flexibly adjust positions to reduce risks while enjoying the benefits of premiums.

Risks and Returns

Image Source: pexels

Profit and Loss Range

When using the Poor Man’s Covered Call, you first need to understand its profit and loss range. The core of this strategy is to buy a long-term, deep in-the-money call option (LEAPS Call) while selling short-term call options. Your maximum loss is the cost of the LEAPS Call. For example, you are bullish on AAPL, with the current stock price at $180. If you buy an AAPL LEAPS Call with a $120 strike price expiring in one year for about $6,500 , you replicate the covered call structure with less than half the capital.

• The profit and loss range of the PMCC strategy is determined by the cost of the LEAPS Call and the premiums from selling short-term call options.
• The maximum loss is the cost of the LEAPS Call.
• Returns depend on the premiums from selling short-term calls and the stock price movement.

You can continuously collect premiums by repeatedly selling short-term calls, reducing holding costs. As long as the stock price does not plummet, your risk is controlled. If the stock price rises to the strike price of the sold call, your profit is capped at the premium and the intrinsic value of the LEAPS Call. You need to note that in extreme market conditions, sharp upward or downward movements can cause significant option price fluctuations, increasing psychological pressure.

Tip: When implementing the strategy, it’s recommended to regularly review the profit and loss range and adjust positions in time to avoid significant losses due to sharp market fluctuations.

Market Performance

The performance of the Poor Man’s Covered Call varies significantly under different market conditions. In a bull market, with the stock price continuously rising, you can generate stable cash flow by repeatedly selling short-term calls, but your profit is capped by the sold calls. In bear or range-bound markets, the PMCC strategy can still generate cash flow, helping you stick to long-term investments. The strategy performs well in flat markets, allowing you to profit consistently in a range-bound state.

• In a bear market, options can provide relative returns and cash flow income, supporting your long-term investment strategy.
• In a range-bound market, the covered call structure allows you to earn premiums even when the stock price is flat.
• In extreme market conditions, call option prices may rise sharply, while put option prices may not fall, making it difficult to stop losses and increasing psychological pressure.

You need to flexibly adjust your strategy based on market conditions. If you notice the market entering a one-sided trend, it’s advisable to assess risks in time and consider buying put options as insurance to reduce potential losses. During operations, continuously monitor market volatility and manage positions reasonably to enhance overall returns.

Summary: With the Poor Man’s Covered Call, you can participate in options trading at a lower cost and generate stable cash flow, but you must always monitor market changes and manage risks effectively.

Strategy Comparison

Covered Call vs. Poor Man’s Covered Call

When choosing an options strategy, you may hesitate between the traditional covered call and the Poor Man’s Covered Call (PMCC). The traditional covered call requires you to hold 100 shares of the underlying stock and sell call options to earn premiums. This approach has a high capital threshold. For example, buying 100 shares of AAPL requires about $18,000 . The Poor Man’s strategy, however, allows you to use a long-term, deep in-the-money call option (LEAPS Call) to replace holding the stock. You only need to invest a smaller amount to replicate the profit structure of a covered call. By continuously selling short-term calls, you can generate cash flow. The core logic of both strategies is similar, but they differ in capital efficiency and leverage effects.

You can choose the strategy that best suits you based on your capital situation and risk preferences. PMCC allows you to participate in the market with less capital, offering a similar cash flow and profit experience.

Advantages and Limitations

When implementing the Poor Man’s Covered Call, you will find it has unique advantages and certain limitations.

Advantages include:

• Low cost: You only need a small amount of capital to participate, suitable for investors with limited funds.
• High efficiency: You can use LEAPS Calls to simulate a traditional covered call position, improving capital utilization.
• Leverage effect: You can generate higher cash flow with limited funds, enhancing profit potential.

Limitations include:

• When choosing LEAPS Calls, flexibility may be limited, as some underlying options have lower liquidity.
• In highly volatile markets, the strategy’s effectiveness may fall short of expectations, with increased profit fluctuations.
• If you fail to manage risks properly, you may face significant losses, especially in extreme market conditions.

When using PMCC, it’s recommended to regularly assess position risks and choose appropriate option contracts to avoid losses due to sharp market fluctuations. You should focus on capital allocation and risk control to fully leverage the strategy’s advantages.

Operational Process

Image Source: pexels

Stock and Option Selection

When choosing the Poor Man’s Covered Call (PMCC) strategy, you need to focus on the selection criteria for the underlying stock and options. First, you can prioritize large-cap stocks in the U.S. market with high liquidity and moderate volatility. For example, tech blue-chip stocks like AAPL and MSFT are often chosen by investors.
When selecting LEAPS options, you can refer to the following points:

• Time selection: You should choose options with an expiration of at least 6 months, preferably between 9 and 18 months. This makes LEAPS options behave more like the underlying stock, with lower risk.
• Strike price selection: You can choose deep in-the-money options with a Delta value between 0.75 and 0.9. This allows the LEAPS Call to better simulate stock ownership.
• Implied Volatility (IV): You should avoid options with excessively high IV. High IV can inflate LEAPS prices, lengthening the break-even period.

During actual operations, you can check option prices through U.S. stock broker platforms. For example, an AAPL one-year LEAPS Call with a $120 strike price costs about $6,500 . You can flexibly choose contracts based on your capital situation.

Trade Management

When managing the PMCC strategy, you need to focus on several key steps. First, you should select appropriate LEAPS options as the base position. Then, you can regularly sell short-term call options to collect premiums and generate continuous cash flow. You also need to reasonably allocate and manage positions to avoid excessive risk from a single underlying asset.

• Select appropriate LEAPS options to ensure a stable base position.
• Regularly sell short-term call options to collect premiums.
• Allocate positions reasonably to avoid over-concentration.

For risk control, you can reduce potential losses through the following methods:

• Choose long-term, deep in-the-money LEAPS Calls to minimize the impact of price fluctuations.
• Manage positions to avoid investing too much capital at once.
• Regularly review strategy performance and adjust position structures in time.

Tip: During operations, it’s recommended to set stop-loss points to avoid amplified losses in extreme market conditions. You can flexibly adjust the strike price and expiration of sold options based on market changes to improve overall profit stability.

Misconceptions and Suitable Investors

Common Misconceptions

When learning the Poor Man’s Covered Call (PMCC), you may encounter some common misconceptions. Understanding these misconceptions can help you better manage risks and returns.

• You may think that LEAPS call options will always appreciate. In reality, when the stock price pulls back or volatility decreases, LEAPS prices can also fall, leading to losses.
• Some believe PMCC is safer than directly owning the stock. In fact, the risk structures are different. PMCC has leverage effects and is affected by time value decay (Theta).
• You may mistakenly think this strategy guarantees profits. In reality, no options strategy ensures profitability. You need to properly combine and manage positions to reduce risks.

Tip: When implementing PMCC, it’s recommended to regularly review strategy performance and monitor market changes to avoid unnecessary losses due to misconceptions.

Suitable Investors

Who is the Poor Man’s Covered Call suitable for? You can assess whether this strategy suits you based on your capital size and risk tolerance.

• If you have limited capital, PMCC allows you to participate in U.S. market options trading at a lower cost.
• You need to have a certain level of risk tolerance. The maximum loss is the cost of the long-term call option, and potential risks cannot be ignored.
• You should have basic options knowledge and the ability to properly combine and manage positions, adjusting strategies in time.
• You want to participate in the market in a low-cost, high-efficiency way rather than investing a large amount of capital at once.

Note: The success of the PMCC strategy depends on whether you can scientifically manage positions and flexibly adjust combinations. Before implementing, it’s recommended to thoroughly learn options basics to enhance risk control capabilities.

You can use the Poor Man’s Covered Call to participate in the U.S. market at a low cost and generate stable cash flow. You need to pay attention to the risk structure, with the maximum loss being the cost of the long-term call option. You should choose the strategy based on your capital and risk preferences.

It’s recommended to learn options basics before implementing, regularly review position performance, and flexibly adjust strategies. This way, you can better manage risks and improve investment efficiency.

FAQ

How Much Capital Is Needed for the Poor Man’s Covered Call?

You typically need only a few thousand dollars to start. You can use a long-term in-the-money call option to replace holding the stock, significantly lowering the capital threshold.

Will I Lose All My Capital if the Stock Price Plummets?

Your maximum loss is the cost of the long-term call option. You won’t face the full market value loss as you would with directly holding the stock.

Can I Adjust or Exit the PMCC Strategy at Any Time?

You can sell the options you hold or buy back the sold options at any time. You can flexibly adjust positions for easier risk management.

Is This Strategy Suitable for Beginners?

You need to understand basic options knowledge. You can practice with a simulated account to familiarize yourself with the process before investing real funds.

Are Premium Incomes Affected by Market Volatility?

The premiums you receive vary with market volatility and changes in implied volatility. You need to regularly monitor option prices and flexibly adjust strategies.

While the Poor Man’s Covered Call (PMCC) offers a leveraged way to generate income, managing options requires expertise and constant monitoring. For a simpler, more direct approach to global investing, BiyaPay provides a powerful alternative. With fees as low as 0.5%, you can instantly convert between 30+ fiat currencies and 200+ cryptocurrencies, giving you seamless access to international markets. Benefit from transparent, competitive exchange rates via our real-time converter and enjoy fast, secure transactions. Whether you’re diversifying your portfolio or moving capital across borders, BiyaPay makes it easy. Visit BiyaPay today and sign up to start building your global financial strategy with confidence.